Just one of the chancellor’s quotes from today’s government spending review. The market seems to believe it does lead to a brighter future as sterling remains within range of where it was before George Osborne opened his mouth.
Despite the pound’s seesaw journey during this afternoon’s session in parliament, it has come out relatively unscathed. This either suggests that the market believes in what the government had to say, or, more likely, has already priced in the potential adverse affects (the other suggestion is that the review had little of any real substance!). The truth is probably somewhere in the grey middle. Most of the spending cuts had been accounted for. However, the crocodiles teeth I have been tracing for the UK currency against its peers on my screen for the past 2 hours tell a different story. If it was all priced in why was there so much volatility?
The truth is this: the next 18 months can go one of two ways. The bleakest view is for most of the west to suffer a double dip. A dire Q4 could put the UK back in recession with stubbornly high inflation and plenty of SME’s going under. It would be a long and slow road to recovery led by the east and a weak UK currency to try and boost exports.
The second scenario would be for the west to narrowly avoid recession with some economies following Japan into stagflation. The recovery would be led by the east (again), the UK’s austerity measures gain traction and market confidence grows, bringing foreign investment and inflates sterling.
Either way, we will see a series of troughs and peaks before we are out of the woods. With the government cutting costs to the tune of £81billion and a VAT hike on the horizon, the UK will be looking to private business to pull us through. The banks need to start lending again, however, with a banking levy on the cards, how likely is that?
Tom Hampton
Analyst – Caxton FX
