• UK is set to have the sharpest GDP decline in Europe in 2023
• Brexit and rampant inflation have a negative impact on the UK economy
• FTSE 100 trades close to levels seen at the start of the trading year

Since Brexit happened, the United Kingdom’s economy has underperformed. No economy should be treated in isolation, but the particular problems created by Brexit are too impactful to be ignored.

According to the latest OBR (Office for Budget Responsibility) and European Commission forecasts, the UK is set to have the sharpest GDP decline in Europe in 2023.

Ireland, Malta, and Romania are at the top of the list, while Germany, Sweden, and Latvia accompany the UK with shrinking economies. But even the German economy, with its heavy dependence on Russian energy, is forecast to shrink much less than the UK.

For those looking for an explanation for the UK’s decline, there is only one – Brexit.

Shortly after Brexit, the COVID-19 pandemic struck. It took the heat off Brexit, as everyone’s attention shifted, but Brexit’s implications are only starting to surface. Despite the UK doing better than anyone else in getting the vaccine out, it turned out the pandemic was only a temporary problem.

In the meantime, the pound is weaker. Indeed, that should help exports, but the GDP’s contraction next year tells us that there are some deep issues with the UK economy.

On top of that, CPI inflation has reached a 40year high of 11% this quarter. While huge, it should have been even higher if not for the government’s EPG or Energy Price Guarantee measures to help households with their energy bill.

It is forecast that rising prices will erode real wages and reduce living standards by 7% over the next two years.

So how is this scenario going to impact the local stock market?
 

FTSE 100 going nowhere in 2022

Despite all the events this year, the FTSE 100 index consolidated previous levels. It currently trades near levels seen at the start of the year, resilient to all the data coming from the UK economy and the global one.

(Click on image to enlarge)

FTSE 100 Chart by TradingView

While the fundamental picture for the year ahead looks bearish, the technical one does not. 7,600 proves to be strong resistance, and a close above should attract more buying interest.

A possible pennant pattern suggests that the FTSE 100 index might rise to 8,000 and beyond should it close above resistance.

All in all, we are still to see the full impact of Brexit. The squeeze on real incomes and the rise in interest rates would only put more pressure on the economy.

So what will prevail in the end for the future FTSE 100 direction – the fundamental or the technical analysis?

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