© Ross Walker
|
It is clearly one of the most important issues that the growth number in the Q1 was surprisingly weak, but against that we have had very strong employment growth, while inflation remains low. It is all in a balance, since there is still a positive economic picture. There is certainly the case that politically it is been more difficult in some ways to present the economies doing so well, when wage inflation remains rather weak. However, in aggregate term if you look at different sectors of the economy and at the overall growth rate of the last two years, the UK has been one of the best performing economies in Europe. I believe there is some recognition of that in terms of the wider public.
Regardless, most economists are upbeat about the prospects of the U.K. economy during the remainder of 2015, as low oil prices have allowed households to ramp up spending. According to fresh forecasts by the International Monetary Fund, Britain's GDP is likely to grow 2.7% during the whole year, compared with 2.8% in 2014. Do you agree with these economists and are you positive on the UK economy in particular?
Our forecast is a slightly more pessimistic - we expect a 2.2% growth this year, however that is not a weaker trend, since it is in line with a longer run tendency. Hence, it is about half of a percentage point below the consensus, and still a little bit low versus the Bank of England forecasts. We take a slightly more cautious view in terms of investments spending and activity by parts of the business community. Also I believe that fiscal policy will have larger drags.
There might be some more broad based tax rises coming at some point, probably next financial year, but anticipation of that might be slightly more cautious consumer spending. However, the overall picture still remains good and the UK will still be one of the better performing developed economies in 2015. Though, we think the risks are that we see a slight moderation in a passive growth versus the 2.8% in 2014.
What could impact the behavior of the Pound throughout 2015?
The main driver in many ways, as well as the main support in recent times have been the expectations that the Bank of England will raise interest rates at some point next year, probably the beginning 2016.To be sure that the growth picture remains reasonably solid, these anticipations, I believe, will remain in place. At the same time, of course, the ECB is implementing QE, so there is a looser monetary policy stands.
We also wait to see what the Fed does, since it is possible we will get the first rise this year. September is our official house forecast, but there is a perception that the risks of the first Fed's interest rate rise comes a little bit later. The timing of the central bank policy actions will be the most important factor. Yet we also have other influences, like the political uncertainty after the election, for example, the perception against that back drop of a change of governments. If we see that investment flows driving up a little bit, that would tend to put downward pressure on the Sterling.
What are your forecasts for EUR/GBP and GBP/USD for the shorter and longer term?
In terms of the Sterling against the US Dollar we have a moderate sell-off. Against the Euro there is a probably less dramatic move, we see a slight depreciation in the EUR/GBP, and a slight appreciation of the Pound. We have the EUR/GBP currency pair forecast towards 0.69 cents by the end of this year.