How Fast and How Much? A revealing week for UK Economic Growth and Government Borrowing
Economic growth in the UK and Government borrowing have been hot topics since our last weekly blog as an unusually hefty amount of data was dished out for dissection. Although there is no avoiding that the current two main staples of any currency connoisseurs diet, Greece and the UK election, have been once again casting their influence, last week was also remarkable for the unprecedented amount of UK key data and statistics released. But how much effect did these have? There were three particularly bad data releases that stood out for the UK economy. We learnt that Government borrowing came in at a total of £163.4 billion for the last financial year, which is the largest of any UK Government in peacetime. Secondly, GDP rose at only 0.2% in the first quarter rather than the anticipated 0.4% (although it is important to say this could be revised up). Lastly, unemployment is at a sixteen year high of 2.5 million. The overall conclusion gleaned from this has been that the UK economy has grown only half as much as expected by economists in the first quarter. Seem like depressing reading? This poor set of data should in theory be bad news for the Pound. The expectation is that such statistics undermine investor confidence. However, Sterling has been doing quite well so far in spite of these poor figures against certain other currencies, in fact reaching relatively high levels against the Euro with many clients choosing to fix the rate as it peaked. The reason is that weakness in the Pound has in fact been masked in the exchange rate by the even greater weakness in The Euro, which is still being haunted by the spiralling effect of Greece’s debt crisis and the more recent down grading of Spain’s credit rating. There is an imminent danger that other EU countries may experience a similar fate which would have serious consequences for the Euro. If this is the case and the Euro continues to get even weaker, there is a chance that this will have a knock-on effect on the US Dollar; money may well flow away from the single European currency and into the Dollar as investors seek a safe-haven currency as an alternative. In turn therefore, Sterling’s current vulnerability may very well reveal itself in its rate against the Dollar, if not against the Euro. So currently Sterling’s should-be weakness is being disguised somewhat by larger events in the worldwide currency markets. However, the new UK figures may rear their ugly head back into the limelight as they happen to have landed in time for the third and final televised electoral debate on the all-encompassing topic of ‘The Economy’ where they will no doubt be dissected. Sterling is far from safe yet.