UK Recovery Slowing
Greece’s debt crisis has taken center stage for months and has dominated currency and financial market news. Many economists believe that the integrity of the multi nation currency is threatened by debt problems in Greece, Italy, Portugal and Spain. One former International Monetary Fund economist believes several defaults will take place this year in the euro zone. The euro zone is not the only economy facing slow and painful recovery. Last week the British pound fell against most major currencies on investor concerns that the UK economic recovery is faltering and the nation may have to struggle to deal with rising debt. The pound is on track for its biggest monthly decline against the US dollar since October 2008. A recent report showed that UK government spending grew 1.2% in the fourth quarter well above predictions of 0.2%. GDP reports showed that the UK economy shrank by an astounding 6.2% since the first quarter of 2008. Stephen Gallo of Schneider Foreign Exchange in London stated, “The market is going to be concerned about the state of public finances in the U.K. The risks are already high of a double-dip recession.”
UK Faces Serious Debt Crisis
On February 26th the pound fell 1% to 89.62 per euro and against the dollar the pound fell 0.7% trading at $1.5153, the lowest since May 2009. Prime Minister Gordon Brown is under intense political pressure to show that he can deal with the UK’s record deficits. The UK budget shortfall is now more than 12% of the nation’s GDP putting the UK on a par with Greece. Recent data shows that the UK’s recovery from the global recession is faltering. House prices fell for the first time in ten months and Bank of England Governor Mervyn King said that the central bank is prepared to do “whatever seems appropriate” to stimulate and preserve growth. Richard McGuire of RBC Capital Markets warned, “A severe consolidation of government finances is both imminent and unavoidable.”
Bad News For the Euro
Several economists are warning of further declines for the already troubled euro. Adam Boyton, a senior foreign-exchange strategist at Deutsche Bank in New York wrote in a client note on February 25th that the euro could fall as much as 6% vs. the US dollar “over coming months” on speculation that the US Federal Reserve will raise rates before the European Central Bank. Boyton wrote, “Looking at past price action would suggest a lower bound for euro-dollar over coming months of $1.2750 to $1.3000. Ahead of that, the next leg down in euro-dollar is more likely to come from pricing a Fed rate-hike cycle than a further re-pricing of fiscal risk in the euro zone.”
