IMF Predict Economic Downturn

11 October, 2012

At the Conservative Party conference yesterday, David Cameron admitted that the UK economy is in a state of crisis, but he personally forsees growth in the near future. The International Money Fund seem to disagree with his assessment, as they slashed its forecasts this week to show the UK economy will shrink overall this year. Despite these concerns, sterling edged up slightly on Wednesday, making gains against both the Euro and the US dollar. Analysts predict these gains won’t last too long however, due to overrall weakness in the UK economy. The fact that David Cameron didn’t announce any plans for growth at the conference has also been seen by some as an admission of the economy being in a poor state. There were reports yesterday that the wet weather had also caused poor harvests in the UK, potentially resulting in slightly increased food prices in the future. It remains to be seen what effect this might have on the UK economy, and by extension, the value of sterling.

Spain’s troubles continue to grow, as rating agency Standard And Poor’s cut Spain’s credit rating from BBB+ to BBB-, making it only one level above the dreaded ‘junk’ status. Despite Spanish Economy Minister Luis de Guindos claiming last week that his nation doesn’t require a bailout, many see his claims as being utter nonsense at best. It now seems likely that Spain, with the highest unemployment rate in the Eurozone, will be forced to accept a bailout in the future. This will likely provide a temporary solution to the troubles there, and slightly raise the value of the euro against sterling. It must be stressed, however, that like with the Greek bailouts, this will only be a temporary solution. The crisis in the Eurozone is now, according to the IMF, beginning to hurt emerging nations, especially in Asia. But considering the protests against austerity in Spain, and the less-than-promising reception of Angela Merkel in Greece, it seems that a solution that pleases both the IMF and the people of the effected nations seems a long way off.

It was announced yesterday that the US economy has seen ‘modest’ expansion in the past six weeks, due to an upward trend in house sales. However, consumer buying as a whole was only slightly upward, due to an increase in fuel prices. We must also remember that the US elections are next month, a time that always produces economic uncertainty. These concerns caused the US dollar to fall away from the month-long high it had seen against sterling, and also stopped it making any gains against the flagging Euro. Many analysts expect the US dollar rate to remain ‘flat’ until November, with any major changed being caused by outside economies, rather than any real action in the US economy itself.

Earlier this week, Boris Johnson claimed that himself and David Cameron “danced Gangnam Style”, as apparantly they do in South Korea. For those not in the know, ‘Gangnam’ is the primary financial district of Seoul. Whilst I doubt catchy dances at the Bank Of England or Wall Street will affect the UK economy or exchange rates much, tiny events can cause huge ripples in exchange rates. Make sure you don’t get caught out by any sudden changes, and call Currency Index if you have any upcoming currency requirements in the coming months.