Is Britain Really Broken?

There is no getting away from the fact that the market is currently being driven by sentiment which makes it extremely difficult to forecast future exchange rate movement against the impact of expected data. In fact a lot of the time the data just doesn't support the movements that we are seeing. We know that things are bad and officially we're in a recession but is Britain really broken? At FC Exchange we've approached our brokers to get their opinions: 

Daniel W (FC Exchange - Desk Manager)

Q) As a country where are we now?

A) The UK is officially in a recession. Two consecutive quarters of declining growth is the definition of an economic recession and GDP (Gross Domestic Product) figures released in Jan 2009 confirmed this for the UK. Growth in the UK fell 1.5% in the final quarter of 2008 and this followed the previous quarter figure showing a decline of 0.6%. Consumer confidence in the UK is very low, house prices have fallen and are still declining, the high street is suffering its worst trading conditions for 25 years and job losses can be seen across all industry sectors and to top it all off some fear that we have not yet seen the worst of it!

Sam G (FC Exchange - Senior Broker)

Q) How did we get here?

A) The UK economy is service based and no longer relies on manufacturing as its primary output; as a result it is heavily reliant on the housing market to keep it afloat. During a sustained period of growth, individuals became confident in releasing and spending the equity that they had acquired in their properties and all was good...

The credit crunch hit and caused confidence and house prices to fall dramatically, as a result many home owners have found themselves facing negative equity in a time where borrowing is both difficult and extremely expensive.  All attempts to date to spur demand and spending by the BoE (Bank of England) by slashing interest rates to make borrowing more affordable have failed because banks are unwilling to lend to their clients.

Lewis (FC Exchange - Senior Broker)

Q) What happens next and how will this affect me as a UK tax payer?

A) As a UK tax payer the major concern has to be the implications of funding the ‘bail out' of the banking system. The extremely expensive bailout (£37 billion) has been necessary in order to prop up struggling banks. Without liquidity the banks have no way of facilitating their products, after all you can't lend clients money if you haven't got it. Long term the tax payer will in one way or another have to make up this short fall in public funds. In the short term the government will fund this with extra borrowing. As we all know at some point this money will have to be repaid. The only real way this will happen is with tax increases. Unfortunately, the cost of the bailout has only just begun. Unemployment figures and benefit claims are through the roof and increasing daily. The only way to fund extra claims in increased public borrowing is long term tax increases.

Liam (FC Exchange - Broker - Euro Desk)

Q) How is this affecting the Pound?

A) There is no doubt that Britain's economy has been hit the hardest by the credit crunch. House prices have dropped nearly 15 % with further losses on the horizon, major financial institutions are folding and the ones that are left are being bought up by the government in an attempt to prevent the worst depression since the dark ages.

 How does this affect the currency? Dramatically is the unfortunate answer, a weak economy creates a weak currency. Over the course of the last 18 months we have seen nearly 30% wiped off the value of the Pound against the Euro and the US Dollar. Can the Pound get any weaker? Yes it can, a combination of poor production and manufacturing figures, escalating unemployment and liquidity problems will all contribute to a shrinking economy. The fate of the Pound now rests on the success of our government funding initiative.

John (FC Exchange - Broker - Euro Desk)

Q) Looking at the UK - Should we stay or should we go?

Like everything in life, the grass always looks greener on the other side or does it? I wouldn't be so quick to jump at that conclusion; in fact one can pretty much guarantee looking at current exchange rates that life in Europe is expensive for anyone not earning Euros. With around 30 % wiped off the value of the Pound in the last 18 months, one would have to be prepared to either pay 30 % more for the same standard of living or alternatively pay the same for 30% less, the choice is yours. Then again, you could always consider emigrating further afield to somewhere like South Africa, Australia or New Zealand where the cost of living is cheaper so arguably the quality is better, the weather on the other hand is definitely better. Let's go.