The imminent severance of ties between the United Kingdom and the European Union is spooking record numbers of foreign investors, with no trade deal likely to be on the table and signed any time soon.
This has led to investors from overseas ridding themselves of UK government bonds as Britain looks set to navigate troubling economic uncertainty over the next few months unless it can rapidly progress forward and agree to key aspects of its exit from the EU.
As well as a stuttering Brexit, the resignation of two key UK ministers, Foreign Secretary Boris Johnson and Brexit Minister David Davis, has only added to the perception of a lack of confidence from abroad. The UK has also been fighting a weakening currency over the last few months.
This is likely to pose serious problems to economists, who will need to be able to secure large quantities of foreign investment to see off a ballooning national debt. The Bank of England looked to remedy this by increasing the interest rate in July; however, the pound dropped as many investors believed that this measure only occurred to give more space to drop the interest rate again if the economy suffered post-Brexit.
Mark Carney, Governor of the Bank of England, has lamented the strategy of over-reliance on foreign investment to shore up one of the largest economies in the world and suggested that the idea was entirely dependent on “the kindness of strangers.” Given that parsimonious talks have been ongoing at times between ministers negotiating the details of Brexit, this may not be the best time for the UK to be so reliant.
Record sales of $17.2bn in UK government gilts occurred from abroad in July alone. This has not happened since the Bank of England began tracking these measures officially back in 1982.
Jeffries Economist David Owen noted that the “month of massive political uncertainty” has certainly had an impact around the world, with embattled UK Prime Minister Theresa May having her grip on power tested. It was therefore no surprise that “international investors were questioning what was going on,” according to Owen.
UK finances in general still need to stabilize even if overseas investors are looking elsewhere. Owen said that the country is still reliant on “net foreign buying of equity and gilts” despite the clear indication that “long-term capital flows and foreign direct investment has broadly dried up.”
Austerity measures implemented in the UK by successive governments since 2010 appear to have gone some way toward reducing the current deficit, which has stemmed the need to attract such a large amount of foreign investment. However, most UK households are borrowers rather than savers, and most of the funds for their spending came from abroad.
Owen said that unless this problem resolves soon, the pound would face another large hurdle while the UK tries to keep the economy steady in the face of the imminent Brexit challenge.
As Owen noted, the European Central Bank is reducing its input into bond buying, and the scheme is winding down. While this is enabling the purchase of gilts, the markets are now flocking to Italian debt, which has been more stable and available in recent months. This has reduced the demand for bonds in general.