© Ross Walker
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There are certainly risks to the downside from the global economy. The most immediate and the most powerful downside risks at this point would be the deterioration in global trade, investment slowdown and risks to the financial sector.
Domestically the economy in the UK has looked a little bit more above. Thus, I would certainly agree that progress was made towards rebalancing the domestic economy in the earlier stages of the recovery. In recent years, UK growth for domestic economy has been driven a little bit more by factors such as retail, consumer services and the real estate markets, whereas, for example, manufacturing in the UK is now back in recession. I believe there are both concerns globally and domestically, and our forecast for GDP growth in the UK is of 2% this year, which is below the consensus that is around 2.3% – 2.4%.
Even though the UK economy has finished the year strongly, there is no room for complacency in 2016, as the struggling manufacturing sector now is definitely a cause for concern. It is known that manufacturing is the greatest creator of wealth that the country has and a lot of analysts believe the government needs to stop sloganeering and do some serious work to support manufacturers. In your opinion, what could the government do in order to thwart the slowdown in British manufacturing and improve the situation?
It is difficult, certainly in the short term, for a policy to have any major impact. One reason why the UK manufacturing sector is experiencing difficulties is that globally, in sectors such as textiles or basic metals production, which might be the most obvious examples, we have a lot of overcapacity, particularly in Asia or China. Thus, there is very little that UK government can do about a global phenomenon.
To some extent, we have seen better performance in manufacturing in the early phases of the recovery 2010 and 2011. It turned out to be higher value added factors and higher value added engineering or pharmaceutical industries. Policies are about one creating an environment of macroeconomic stability that supports confidence and helps planning. It is also about supply side measures, everything from physical infrastructure to education system, about fostering links between research institutions, universities and industry.
I do not think there is any magic wand that can quickly change the prospects of the sector, because by definition it is the most globally exposed part of the UK economy. However, to that extent, if you wanted to support manufacturing growth, you would have to have policies that would focus more toward the higher technology, higher value added and of the spectrum. There is a big debate about just how much intervention there should be from government in the macroeconomics. I do not believe that subsidising industries such as steel, where there is currently overcapacity globally, would make much sense. That would simply result in taking resources away from better performing parts of the economy and transferring it into the sectors where there may not be a longer term future.
In your opinion, what factors will influence the performance of the Pound this year and what are your forecasts for GBP/USD and EUR/GBP for the Q1 of 2016 and in a longer term?
For the currency interest rates, expectations are usually the most powerful short term driver. The market at the moments is pushing back its expectations for the timing of the first Bank of England rate raise. It is not fully priced until into 2017. I believe that in the recent weeks, it has probably been the single most important factor pushing the Sterling lower. We also have the EU referendum, probably in 2016, we do not yet have a date, but it is expected to be this year. It would clearly generate some nervousness among global investors. From the gross perspective of course the UK has challenges, but looks relatively good. It would again be one of the fastest growing developed economies. The gross side I suppose should provide some support, but I think that EU or political risks, with a less interventions, less aggressive and hawkish view of BoE monetary policy will tend to put the downward pressure on the Pound against the Dollar. On the Q1 of this year we see some further declines in GBP/USD, a lot of that is already on the way, but it can probably go a little bit further. Against the Euro, it may be a little bit nuanced, since we expect the ECB to announce more QE. Thus, on balance there may be some modest Sterling gains against the Euro.