“Britain in a bind”

Posted: 29/01/2013

Tristan Hanson-Ashburton
Ashburton's head of Asset Allocation, Tristan Hanson (pictured) gives his views on UK's current economic performance and its effect on sterling:

“UK leaders have struck some very discordant notes in recent weeks: Osborne, Johnson, Cameron, Clegg, King, and Carney. Given the disharmony, it is not surprising that sterling has been one of the weakest currencies so far this year, down over 3% against the US dollar and outdone only by the Japanese yen and South African rand. This is perhaps one development that will have pleased most UK policymakers – lately BoE Governor King has been particularly vocal on the desirability of a lower real exchange rate as a means of rebalancing the economy. Moreover, comments from Carney, who will take over from King in July, suggest he is more in favour of aggressive monetary policy than his predecessor, which would be consistent with a weaker exchange rate.

“Recent data indicated a 0.3% (quarter-on-quarter) contraction in the UK economy in Q4. After bumper growth in Q3 (boosted by erratic statistical factors), data showing a contraction was expected, but the disappointing figure once again highlights the UK's recent economic stagnation. Over the past four quarters, there has been zero growth on average.

“It is not all bad news in the UK – jobs growth is encouraging, housing data has improved, credit conditions are easing and a modest wider recovery is probably underway, disguised by the noise of erratic quarterly data. But while economic growth remains weak, the policy message unclear, and the incoming BoE Governor suggesting looser monetary policy, it seems likely that sterling will have a bias to depreciate against a basket of currencies for the time being.”

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