Pound sterling could be the next victim of the global economic crisis says HSBCPosted on 08 January 2013 with 12 comments from readers
The pound sterling could slump this year as the problems of other currencies recede and refocus attention on problems like Britain’s persistent trade deficit and huge debts, according to HSBC.
Its latest report highlights a nasty ‘triple cocktail’ facing sterling as the US steps back from the fiscal cliff, momentum grows in China, and eurozone break-up fears diminish. HSBC warns, ‘The pound’s fiscal credibility is under threat as a sovereign downgrade looms.’
‘The pound looks set to lose the contest of the uglies as its frailties emerge from the shadows,’ concludes HSBC. The bank expects sterling to lose about five per cent of its value against the US dollar and end the year around $1.50.
No safe haven
Sterling has benefited from safe haven status in the financial storms of the past couple of years and basked in the supposed benefited of independence from the euro. It looks as if the tables are about to turn.
As ECB president Mario Draghi pointed out at the start of the year the economic fundamentals of the eurozone do stand out as far sounder than most of the rest of the world. To that extent austerity is working, though it is not working for the millions of unemployed, particularly in southern Europe.
A cheaper pound might help exports but the cost will come in higher domestic inflation. This will gradually erode the real burden of debt carried by the UK economy but then again interest rates will also rise so the cost of carrying this debt will go up and not down.
With so many UK consumers dependent on low mortgage rates this would be a disaster for many domestic households. Higher interest rates would therefore tend to depress UK house prices that have been resilient in the face of the global economic crisis thanks to record low mortgage rates.
Does this mean the UK is going to suffer its own version of the crisis afflicting the peripheral states of the European Union with its independent currency backfiring badly? It could be that yet again the Europeans have the last laugh and the europhobic Britons end up paying for not being a full member of the club.
Certainly if you took Mario Draghi’s list of economic fundamentals that are sound in the eurozone, most of them would not apply to the United Kingdom. Currency devaluation might bring some relief but it is no cure all.
Here comes the day of reckoning for the UK!