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Fri Dec 05, 2008 10:44 am Reply with quote
Sterling set for new lows next year
By Deborah Hyde . Citywire | 08:20:01 | 05 December 2008
Sterling is set to continue to fall in 2009 and will hit a low against the dollar by the middle of the year as the UK economy continues to struggle in the midst of the global downturn.
As part of a report on the macroeconomic outlook for 2009, Merrill Lynch economists said they expect sterling will fall to a low of 1.3 against the dollar in the middle of next year. The pound will continue to fall against the euro into 2011.
Weak is good
But the weak pound is actually one of the few elements offering support for the UK economy, according to the analysts.
The significant depreciation in sterling since summer 2007 has helped to support growth and relieve imbalances within the UK economy, they said.
'The weakness of sterling is beneficial because import price inflation is plummeting,' said Klaus Baader, chief Europe economist at Merrill Lynch.
And he said he thinks the benefits of lower sterling are here to stay; even if the dollar begins to retreat a little – as Merrill expects it to do – sterling will remain well below previous highs.
Baader thinks UK businesses and the government need to do all they can to boost exports. He says the government needs to create an environment that is supportive of capital expenditure.
Oil price outlook
As part of the outlook, Merrill Lynch economists also cut their crude oil forecast to $50 per barrel for 2009 to reflect lower energy demand.
They expect the price to trough in the middle of 2009.
The major downside risk to this would be a downgrade to their China growth forecasts.
They are currently factoring in Chinese GDP growth of 8.6% for 2009 but said oil could go as low as $25 per barrel if the global recession extends to China.
Unless that happens, oil prices could trough at the end of the first quarter or early in the second quarter as economic activity starts to strengthen.
Industrial metals will also face more downward pressure in the short-term although Merrill believes inflation and cost of money should eventually push commodities back up.
Turning to specific UK issues, Merrill Lynch said the country doesn't have the right industries to take advantage of the rebalancing of the global economy and will likely feel the brunt of the current global downturn for six quarters.
The picture for the UK is particularly grim because of its high exposure to the financial services sector, which means it is not well placed to take advantage of rising demand from developing nations, said Baader.
He points out manufacturing accounts for only 13% of UK GDP.
High levels of indebtedness and low savings ratios are also going to stymie the recovery.
'The particularly acute tensions in financial markets in September and October along with further underlying deterioration in the economy are likely to result in a particularly sharp contraction in output in the near-term,' according to today's report.
Indeed, with credit conditions remaining very tight, house prices continuing to fall sharply, unemployment picking up significantly and households rebuilding savings, Merrill Lynch expects real consumer spending to decline throughout 2009.
Tighter credit conditions, decreasing use of its capacity and a weak demand outlook will curtail business growth, they added.
Thus, the economy is expected to continue to contract until late next year, with output in 2009 as a whole falling 1.6%.
Nevertheless, the expected declines in both CPI inflation and interest rates from around 5% in summer 2008 to 1% in 2009, along with expansionary fiscal policy, should provide support to demand, and thus the contractions in output are expected to ameliorate through next year.
The financial crisis is prompting US consumers to repair their personal finances by saving more and spending less, which combined with a reverse behaviour in China could see an end to the imbalance in the global economy, Merrill Lynch said.
'In the long run emerging markets will rely less on Anglo-Saxon consumption,' said
'We are witnessing an end to global imbalances as US consumers adjust their habits and emerging economies turn inward,’ said Alex Patelis, head of international economics at Merrill Lynch.
In China especially, Merrill Lynch expects lower interest rates and higher government spending to stimulate domestic demand.
And Patelis thinks a strong leadership could spark increased spending in other emerging economies too.
Since developed economies are contracting, emerging markets are on course to deliver more than 100% of global growth next year and businesses need to shift their behaviour to reflect this.