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After the Brexit, the pound fell immensely, by 8.4% in one day, to its lowest since 1985, which was the biggest one day fall on record. Since the morning of the referendum result, the pound has deprecated by around 11% against the dollar without any large fluctuations in the last two months. The depreciation of the pound could be seen as a double-edged sword. It caused a significant boost in exports in several industries in the United Kingdom due to British prices becoming relatively lower for the world, but prices of imported goods, such as raw materials, have and will continue to rise.
Figures do show that in the short term the market performed much better than anticipated. Consumer sentiment maintained its growth, partially due to the resilience of the British people and their confidence. Additionally, business sentiment bounced back after a massive drop. However, inflation projections have soared due to the weakness of the pound relative to the rest of the world. This directly increases import costs on producers in the UK, which will eventually be passed on to consumers and soon oblige the Britons to cut back on spending. Also, analysts believe that the current situation has caused a significant decrease in investment and hiring plans, which will hit demand.
The Central Bank believes that the UK economy will slow down in the second half of 2016 and next year. This is due to the uncertainty of the UK’s future trade agreements with the world, as it is law of economics that trade growth and economic growth go hand in hand in the long term. Therefore, the UK started taking the necessary actions to encourage borrowing. The Bank of England cut interest rates to 0.25% for the first time in seven years, along with a package of measures designed to support the economy.
An interesting point that was brought up by some experts was that they expect the Brexit to cause problems in the long term, but the longer it takes for the economic setbacks to arise, the harder it gets to convince skeptics that exiting the European Union was the cause.
The EU expected the UK to be hit by a massive economic shock and that it would deter other EU members from thinking about leaving. So far the UK’s economy has been quite resilient and some of the strong members of the EU have been playing around with the thought of following the UK. Nonetheless, some experts remain positive and expect that the relationship between the EU and UK will remain strong, and trade deals will be as free as it is now and will not harm Europe.
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