The Sinking Pound
February 20, 2010
The pound has been hit badly over the last couple of years, however things can get worse as recent data highlights more problems
The good(ish)
UK's national net debt was confirmed the 18th of February at £848.5bn - the equivalent of 59.9% of the country's annual output. This is some way below the so-called PIIGS. Greece has net debt of around 130% of its GDP, Italy just above 100%. A national debt of this level after the worse recession of recent times is somehow acceptable in my view.
The bad
In 2009 Q4 the stock of lending to companies fell across all the main sectors of the economy for the third consecutive quarter as reported by the Bank of England this week. The December 09 contraction of 4.3% is particularly worrying if compared with the small expansion in November. The banks are not lending, businesses will not invest and hire people. Unemployment won't decrease in the near term. Double dip recession? More probable than possible.
And the (very) ugly
The real worry for the pound and UK PLC is the fiscal position which can lead to spiralling debt if unemployment won't ease and business won't pick up. Key facts:
- UK government borrowed £4.3bn in January – a month in which tax revenues are supposed to be swelling coffers. It is the first time the UK Government has had to borrow money in January since records began in 1993.
- Projected budget deficit to be close to 180bn, approximately 12.8% of British GDP. Not a bad effort! if you are interested in the details check out the breakthrough of 2009. This deficit is greater than the 12.7% of Greece which is facing a full-scale fiscal crisis and may need to be bailed out by fellow eurozone nations or the International Monetary Fund.
The next government will face important decisions an the absence of any positive adjustment to the UK fiscal position can lead to a run on the pound. Is this risk priced in at current level of exchange rates? Maybe. I feel probably not.