Thursday, 16 September 2010 10:04

False Rebound

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Against all expectations the Q2 GDP figures for the UK economy demonstrated a growth of a remarkable 1.1%, one of the highest figures found anywhere amongst the emerging economies. Whilst political parties on both sides of the House debated as to who should receive the credit for such a boost, the real results were being felt across the markets.

As the figures were released, unsurprisingly, sterling took a bounce against both the dollar and the euro. This hike wasn’t solely the result of the good GDP figures for the UK, but also on the back of fears that the stress-testing of euro banks would reveal that some banks weren’t quite up to scratch. These fears were later born out, and sterling looks set to rise further across the coming week.

Economic experts in the UK predicted rather gloomily that the 1.1% growth would be as a good as it gets, pointing to the growth provided by the building and construction sector as a one-off due to catching up on the backlog left behind after the particularly bad weather of the winter.

There is, however, another problem in the long run for the UK economy and that’s the fact that as long as it continues to perform well (or, more accurately, outperform the eurozone) sterling growing stronger is not actually going to be that much of an assistance to the recovery. The UK’s largest trading partner by far is Europe, and the government really needs a weaker pound against the euro to bring in extra trade to the UK and further drive the recovery.

Of course, on current evidence, that simply isn’t going to happen, or not for any time soon, leaving the UK without a major region to export to (a problem that isn’t unique to Britain by any stretch) and relying, to a certain extent, on exports to continue the boost in the economy. Whilst the services sector may continue to perform strongly, there are other places in the world to do business and that business is likely to gravitate away from the UK if it’s much cheaper to do it somewhere else.

So, sterling finds itself in between a rock and a hard place and some people are arguing that it would have been better to join the euro and be in the position of Germany, for example, which has seen exports within Europe increase rapidly over the last decade. Of course, a German bank failed the stress-tests as well, so there are further problems to be dealt with in the eurozone.

It is not an overstatement to say that the strength of sterling will dictate the strength and the extent of the recovery in the UK economy. Regardless of how you trade in the markets, whether it’s directly or through a spread betting company like CMC Markets, make sure you keep an eye on the comparative strength of sterling against the other major currencies, it is guaranteed to have an impact on your markets.

Last modified on Thursday, 16 September 2010 10:53