London 23/11/09-The latest report from the OECD (Organisation for Economic Co-operation and Development) has cast further aspersions on the UK’s economic recovery – and worrying implications for the future strength of the Pound.
According to the widely-respected report, the OECD said that Britain is at risk of a “public debt spiral” unless the government takes drastic action to cut the public deficit.
In 2010, public debt is likely to be over 13% of GDP, an unprecedented figure, and S&P have already issued a warning about the security of the UK’s credit rating. On top of all this, the Office of National Statistics has said that public sector net borrowing was £11.4bn in October – treble that of last year.
All this is bad news for sterling, as foreign exchange markets react strongly to a lack of confidence in the UK economy, with a weaker Pound the result.
“Unless Britain can show that it has a sustainable plan to reduce its debt levels, we are likely to see exchange rates remaining low for the next 3 to 6 months”, said Chris Hall, analyst at foreign exchange house Currency Index.
“In addition to the public debt problems, the fact that the UK is lagging behind other major economies in terms of recovery from the financial crisis means that interest rates in the UK are likely to remain lower for longer than elsewhere. Low interest rates typically lead to a weak currency, so sterling faces a double-edged sword in 2010.”
For individuals and businesses who need to send money overseas in the short and medium term, the outlook for exchange rates is still potentially negative. There is unlikely to be any intervention in foreign exchange from the government, since a weak Pound helps the exporting manufacturing sector, so for importers and individuals buying overseas property or emigrating, a weak Pound may be inevitable for the foreseeable future.
