By Jason Gaywood, director, corporate premier services at foreign currency exchange brokers HiFX
Rather like the weather, the outlook for the UK economy and Sterling looks remarkably bleak as markets digest the failure of George Osborne to meet his debt targets.
As the rating agency, Fitch, threatens to cut the coveted AAA rating for the UK, many market commentators are now suggesting that Britain can no longer blame external factors for the lack of growth in the domestic economy. Clearly the mess that is the Eurozone is having a negative impact but in real terms only 16% of UK exports go to Europe. Further afield, the ‘fiscal cliff’ in the US and the slowdown in China are worrying developments and are likely to act as a hindrance at home. However, it is high time that all the stone throwing stops and the Government realises that a preoccupation with austerity and cuts will not prime the economy back into growth. Fiscal stimulus is the only way to rebalance what is a balance sheet recession. With the road to recovery now looking like it will stretch out to 2018 and probably beyond, the only thing that is keeping the Chancellor to his current tactics, as is so often the case, is the fear of being seen to change his mind and admit that he made a mistake.
The distressing outcome of this flagrant belligerence, is that not only do we all have to endure a prolonged cut in living standards but also that the rigid adherence to the failing policy of cuts is that they are likely to further aggravate the already dire situation. If, and it is still an if, Fitch and others do cut the UK’s credit rating, the cost of borrowing will go up, rebalancing will disappear over the horizon and UK Companies will be devalued by global equity markets. This scenario, with all the extra money floating about in the wake of excessive Quantitative Easing, has the distinct smell of stagflation about it, whereby we get trapped in an stagnant economy coupled with the sceptre of rampant inflation.
Mr Osborne, stop blaming the neighbours and get your house in order before it’s too late.