UK out of recession, pound falls. Sterling outlook for 2010 still week.

Good Morning. The pound dropped yesterday after the official GDP figures were released. The announcement confirms the UK is now out of the longest recession on record, but only just!

The UK economy has come out of recession, after figures showed it had grown by a weaker than expected 0.1% in the last three months of 2009. Analysts expected the economy to have grown by 0.4%, so although we are out of recession, it’s not by as much as we thought.

As the figures had been forecast for some time, the pound had strengthened in the last week in anticipation of the release. When the actual figures came in worse, many investors sold Sterling which weakened the currency and caused Sterling exchange rates to drop.

The economy had previously contracted for six consecutive quarters – the longest period since quarterly figures were first recorded in 1955.

As you can see from the chart, it’s not exactly a strong recovery. So, does this mean things will continue to improve? Not by any means. Although confidence in general is improving, there is a chance that Britain will slip back into recession — as it did in 1991-92.
While it looks as if the economy will show growth for the first time since early 2008, it has shrunk by 6 per cent in total. Analysts expect economic growth of only1.4 per cent this year and 2 per cent next year, well below the typical growth of 2.5 per cent to 2.75 per cent a year seen in good times.
So, we could have a double dip recession. The recovery in manufacturing, which has enjoyed its best quarter for two years, largely depends on exports, and these have been helped by falls in the value of the pound, making their products cheaper to overseas buyers. If the exchange rate reverses and the pound strengthens, so could our overall economic prospects as exports would suffer, and the pound could weaken again. So this could possibly be a viscous circle with signs of recovery, spikes in rates followed by a contraction again.
So, while it’s good news that the UK is out of recession, it is clear the economy is not out of the woods yet.It’s not impossible to imagine the first quarter returning to negative growth on the basis of today’s data.
Chancellor of the Exchequer Alistair Darling said he was now sure that “we are on a path to recovery. “I’m confident but I’ll always remain cautious”. Great! That’s fine then.
Shadow chancellor George Osborne told the BBC yesterday that the UK needed a “new model of economic growth” under a Conservative Government. He added: “Let’s be clear – this is about as weak growth as you can get.” I would agree.
Liberal Democrat Treasury spokesman, Vince Cable said the markets would be surprised that growth had been markedly slower than expected. “Far from the quick recovery the chancellor has been praying for, the economy is only just staggering back into growth,” he said.
So, good news that we’re officially out of recession, but while Germany and France recovered last summer in a more significant way, Sterling remains the weak currency out of the majors.
This is the best news for the pound in a while, however rates are still roughly where they ended last week at. Eyes now will be on what the Bank of England will do with interest rates, but as they are expected to remain very low for some time, I don’t see where any significant Sterling strength will come from in the months ahead.
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