Some light at the end of the tunnel finally arrived today for the beleaguered UK economy in the form of the EY Item Club’s forecast for the year ahead. It has been one-way traffic against the Pound for some time much to the anguish of any Sterling sellers.
As widely expected, the Pound has been on the slide against the US Dollar from as far back as June last year when it topped out at 1.5879. The depreciation has gathered pace since the Federal Reserve raised interest rates in December with the market now trading in the low 1.40s; the lowest level since March 2009.
Against the single currency, in mid-November Sterling was trading at 1.43 – just a cent shy of the 8 year high – but has now tumbled to a 12 month low. Current exchange rates can be found in the low 1.30s and may yet fall further in to the high 1.20s. Last week Barclays revised its forecasts down although still see the Pound recovering to 1.38 and then 1.43 in Q2 and Q3 respectively this year. Reason for optimism perhaps but this offers little solace to those with an immediate need to transfer money.
Barclays view perhaps matches that of the Item Club which predicts a 2.6% growth in GDP, up from 2.2% last year. This is based on an expected increase in consumer spending up 2.8% as a result of low inflation and the Chancellor’s decision in his Autumn statement to postpone cuts in tax credits. As Peter Spencer, the Item Club’s Chief Economic Adviser explained;
“The consumer had a welcome holiday from inflation and austerity in 2015, and, until recently, this had looked set to come to an end. However, the combination of further falls in commodity prices and the money that the Chancellor found behind the sofa for his Autumn statement ‘give aways’ means that this holiday will be extended into this year.”
While positive, the forecast still identifies clear risks in the 12 months ahead. The geo-political tensions in the Middle East, be they humanitarian or oil based, will have to be monitored carefully. Ongoing uncertainty with China is also a concern. UK exports have already been adversely affected although a silver lining has been provided by rising numbers in the US and EU. Closer to home, the EU referendum has been singled as having the potential to cause disruption.
Inflation is expected to remain well below the Bank of England’s 2% target reaching just 1% by the end of the year, which may stay the MPC’s hand yet further in regards an interest rate hike. 2017 is seen by the Item Club as the year that inflation and austerity return slowing GDP growth to 2.3% and then to 2.2% the year after.