Forecasts Pound and Euro in 2010

The UK economy is slowly emerging from the worst recession since the Great Depression of the 1930s. The recovery is being helped by:

• A weak pound and rising demand for exports
• Unprecedented loose Monetary policy – zero interest rates, quantitative easing.
• Loose Fiscal Policy

As the economy recovers, there is a chance of the Bank of England putting up interest rates towards the end of the year. This may finally start to make the Pound look more attractive. However, the Bank is likely to delay interest rate rises for quite a time. They will be reluctant to raise interest rates because:

The recovery is predicted to be anaemic (around 1% growth for 2010). This growth rate is still below the economies long run trend rate so spare capacity will still increase.

Peter Spencer, chief economic advisor to ITEM, has said the British consumer has very little cash to spend and the economy has a worrying dependence on foreign demand for UK exports. (see: Telegraph article)

The government need to show signs of tackling the fiscal deficit which has grown to record peace time levels (current annual budget deficit is around 14% of GDP). To reduce deficit will require higher taxes / lower spending. This will reduce weak consumer demand and therefore low interest rates will be necessary to avoid a second recession.

The weakness of the UK economy suggests that the Pound will continue to be weak against the Euro in 2010. It must be remembered this credit crunch hit the UK with its reliance on finance sector more than our European partners.

Of course, a weak pound is, in these circumstances, a blessing in disguise. It helps provide some demand in the economy. Our Greek, and Italian partners may not admit it. But, they must wish they had some of the UK’s flexibility in dealing with high budget deficits and a weak recovery.

See: Problems Greece has with being in Euro and trying to deal with high debt.