Pound Wobbles As UK Ends 2012 On A Low Note

MUCH AS I hate to be the bearer of bad news, it’s hard to put the UK’s economic performance for the last month of 2012 in a good light.

For instance, take the services sector, which accounts for three quarters of economic output in the UK. This shrunk for the first time in two years in December, falling to 48.9 according to Markit’s closely watched PMI index. (According to this index, figures below 50.0 point to economic contraction, and the smaller the figure, the steeper the decline.)

Elsewhere, look at Britain’s deficit in goods and services with the rest of the world. This reached -£3.644bn last month, in spite of the fact that Chancellor George Osborne has dedicated much time and effort to ‘rebalancing’ the UK economy to boost exports. To judge from this figure, he’s yet to enjoy much success.

Or, take how much the government is borrowing. The Coalition added £15.328bn to the UK’s credit card in November, way above forecasts for £14.2bn. This tells us the government isn’t having much luck bringing down the deficit, when, as anyone can tell you, is what this government is meant to be doing above all else.

So, Britain spent the last month of 2012 doing what it did throughout the rest of last year: spinning its wheels, going nowhere. Given that, would it surprise you at all if I told you the pound fell in December, losing two cents to the US dollar?

Alas, it pains me to say that, with all this happening, the prospects for neither the UK nor the pound in 2013 look much rosier. If the services sector continues to shrink, that greatly enhances the odds of the UK entering a triple-dip recession. And unless the government gets its spending habit under control, the UK’s debt position will not improve.

Is there anything that could clear these grey clouds, either for the UK or sterling? Well, as you may know, the strength of the pound depends not just on what’s happening in the UK, but the rest of the world too. For instance, what’s happening in the US will clearly influence the pound to US dollar exchange rate.

On this front, the pound’s prospects improve notably. This is because the US economy is picking up, unlike that of the UK. What happens is, when the US economy picks up, the US dollar actually tends to fall, because it’s a safe haven that only does well during bad times.

So for instance, there’s news that the US services sector is going gangbusters. It hit 56.1 last month, according to ISM’s economic index (just like with the UK, figures above 50.0 point to growth, with the higher the better.) There’s also news that the US created 155 thousand jobs last month, beating forecasts by five thousand.

That’s the sort of thing that could make the greenback fall, which of course will benefit the pound by extension. Given that, if sterling does well in 2013, I think it’ll be because the US economy picks up, rather than the UK. Ironic, huh?

What do you think? Have I got the outlook wrong? Will the UK do well in 2013, and the US badly? Let us know your thoughts in the comments.