The saving grace of trade

The falling value of the sterling against the euro may reduce the trade deficit and have the effect of bolstering the British economy in 2009

If you are a Brit, don’t cancel that Spanish holiday just yet. The pound may be suffering, but the euro could be next in line, if speculators decide to look for fresh opportunities in the New Year. 
Treasury Chief Secretary Yvette Cooper was in a fairly bullish mood at the weekend when she said that the British government has no intention of stabilising the home currency, intent instead on directing efforts towards resisting inflation. 
Sterling has dropped 24 percent versus the dollar in the last 12 months, and more than 22 percent against the euro. On Thursday it hit a record low, falling for the ninth day straight. It is now worth about 95.5 pence per euro.

Many believe the BoE will follow the Fed Res in cutting the cost of borrowing to zero. 
The last time the country faced such a crisis was during its exit from the ERM in 1992. Back then the fall was associated with recession, speculators and the limited parameters of the mechanism. Today it is more aligned with a single factor: vast national debt. 
Sterling has been unable to cope with Britain’s status as one of the developed world's worst-performing economies, based on predictions from organisations such as the IMF and OECD.

Latest figures from the UK Treasury confirm debt will climb above £1trn by 2012, while borrowing as a proportion of national income will outstrip levels in the 1970s. 
Former Prime Minister Tony Blair’s problem at the turn of the century was considered to be the pound’s strength. It undermined any efforts to unify the currency with the euro and almost certainly helped turn Britain into a credit-fuelled consumer nation, hungry for cheap imported goods. 
The UK's trade gap had widened significantly by October 2004, when imports hit a record monthly high of £21.5bn. Meanwhile exports moved in the opposite direction.


Manufacturing output in 2008 has slowed to record levels, falling in October by the largest amount in more than six years, according to the Office for National Statistics.


The ONS revised the decline in industrial production for September 2008, saying the new data would be enough to lower economic growth in the third quarter from a contraction of 0.5 percent to one of 0.6 percent.

But things are not all bad for UK, which is beginning to import less and buy more at home. Inevitably, consumers will spend less on overseas holidays, while both foreign and domestic travellers will make use of more time in the UK throughout 2009 due to the value of the pound.


Exports of UK food and drink are at a record high. Figures released by Food From Britain show that in the first six months of the year food exports rose by 15.5 percent compared with the same period in 2007. Exports are expected to exceed £13bn for the first time by year end. 
Sterling’s fall may have coincided with government plans to borrow £118bn in 2009, but exports could reap rich rewards.

The crisis facing the wider Eurozone will become clearer over the coming weeks when the strength of the euro will be tested. I predict a fall.