Why has the British economy strengthened? Or has it?
The Chancellor’s recent encouraging news on growth in the British economy has strengthened sterling against most other currencies. Online forex traders should be careful, however, as the effect is unlikely to be permanent.
The UK growth figure for the quarter June – September 2013 was 0.8 per cent, which was an increase on the two previous quarters, and also higher than the expectations of the International Monetary Fund, whose chief economist had described George Osborne’s fiscal policies as ‘playing with fire’. It was better also than the predictions of the Chancellor’s own fiscal watch dog, the Office for Budget Responsibility, which in March predicted an annual growth rate of 0.6 per cent.
However, this growth comes from a very low baseline. The British economy is still smaller than it was before the recession,in the first three months of 2008. Also, although there has been a recent rise in manufacturing output, it is still over 3 per cent lower tnan it was when the Coalition came into power. The services sector, in particular financial services, has accounted for most of the growth overall.
Another potential problem lies in the British inflation rate, which at 2.7 per cent is higher than that of most of Britain’s competitors. The increase in prices coupled with static or falling real wages is bound to result in weaker demand in the long run; there is evidence that currently, demand is only being sustained by increased credit card borrowing.
The implication when trading forex is that the current boost to British financial confidence may be short lived, and could soon be followed by a backlash which would impact on the strength of the pound.
