After a torrid time for sterling, is the UK economy heading for trouble?

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A one euro coin (Foreground) is pictured
The pound has fallen against all major currencies (Source: Getty)

Andrew Sentance, senior economic adviser to PwC and former member of the Bank of England’s MPC, says Yes.

It is not just Brexit which is undermining sterling at present. The UK has a large balance of payments deficit. The government still has a large deficit – and Philip Hammond seems more relaxed than George Osborne about reducing it. UK interest rates have been cut closer to zero when they are rising in the US. That takes us closer to the negative interest rates we now see in Europe and Japan. And our economy is set to move from the top of the G7 growth league this year to near the bottom in 2017.

This is hopefully a temporary phase, but Theresa May’s government needs to demonstrate that it has a grip on the economy and can set a clear direction for the future. At present the jury is out, but clear and positive decisions on airport expansion, tax reform and housing policy could make a big difference.

The currency markets will be looking closely at Hammond’s Autumn Statement to turn the tide of drift which has contributed to the recent weakness of the pound.

Kallum Pickering, senior UK economist at Berenberg, says No.

The UK economy is likely to continue to expand at a stable – albeit quite subdued – rate for the time being.

Remember, the consumer drives aggregate demand in the UK. Household fundamentals remain sufficiently solid. Employment has risen to a record high, credit is cheap and easily available, and household finances have improved since the financial crisis. Short of a sharp drop in house prices, households can ride out a period of uncertainty and provide the demand to keep the economy growing. While Brexit fears will likely cause a decline in investment spending, this will partly be offset by an improving trade balance thanks to the more competitive exchange rate.

The risks are serious. But they refer mostly to the long run rather than the immediate outlook. The recent drop in sterling reflects heightened concerns that the UK could be heading for a hard Brexit. Less trade, migration and investment with its major market, the EU, would be unequivocally bad for the UK’s long-term potential growth rate.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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