GDP figures show we’re not out of the woods yet

January 26, 2010

MarkBolsom-150x150.jpg-Mark Bolsom is the Head of the UK Trading Desk at Travelex, the world’s largest non-bank FX payments specialist. The opinions expressed are his own.-

As expected, Gross Domestic Product figures released today confirmed that the UK has finally emerged from recession. According to the Office for National Statistics, the UK economy grew by 0.1 percent during the last 3 months of 2009, bringing to an end 6 consecutive quarters of contraction.

In response to the news, the pound dropped to a session low against the US dollar of $1.6150 from a high of $1.6265 earlier in the day. Against the euro, the pound slumped to €1.1452 from an earlier high of €1.537.

Although markets will welcome the official confirmation that the economy has expanded following the deepest recession in generations, they will ultimately be disappointed with the minimal growth, given the huge monetary and fiscal stimulus employed by the authorities to boost the economy.

Certainly, today’s GDP figures have huge implications for future monetary policy. After the Bank of England Monetary Policy Committee member Andrew Sentance commented last month that interest rates may have to go up, economists speculated that rates could rise as early as February 2010. The GDP data is likely to force the Bank of England to delay any plans to raise rates, as they will not want to choke off recovery too early.

However, this is likely to cause longer-term problems, given that the annualised rate of inflation hit 2.9 percent last month. With recovery so weak and fragile, the Bank can no longer exercise traditional methods of inflationary control, and, as a result, have left themselves exposed to rising inflation. I stand by my forecast that rates are likely to stay on hold at 0.5 percent until 2011.

Before the figures out today, the Bank was widely expected to announce the conclusion of its quantitative easing programme in February. It’s highly debateable whether this is still feasible, as the main areas that dragged the economy into growth last quarter were supported by Bank of England-backed stimulus spending.

The real issue to arise from today’s figures is the potential effect it will have on the UK political landscape. Whilst Gordon Brown continues to encourage public spending, the Conservatives are promising deep cuts and have accused Labour of “moral cowardice” for failing to deal with our ballooning budget deficit.

The GDP figures provide no real support to either argument, and are unlikely to persuade voters over to a different camp. Whilst Gordon Brown and Alistair Darling have not pulled off a miracle recovery, the fact that we are returning to growth, supported strongly by quantitative easing, suggests that it would be an error to choke recovery off in it’s infancy with “massive” spending cuts and higher taxes, as the Conservatives have promised.

Clearly, we’re not out of the woods yet – the chances of a double-dip recession cannot be ruled out. I forecast we’re in for a bumpy couple of years yet.

What are your thoughts? Post your comments below or on our twitter page – TravelexFX

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