One can often get caught up in the bleak outlook for the UK economy, with its borrowing problem and slowing growth. However, what needs to be pointed out is that this is being resonated throughout the world.
The UK was one of the first countries to address the debt problem with austerity measures, helped by the new coalition government, and with a competitive and flexible currency the UK is well placed to weather the storm. Also, the diamond jubilee and the Olympics will make the UK an attraction, and give a much-needed confidence boost.
2012 will see a drop in the inflation rate as the higher commodity and transport costs of 2011 ease. However, the consumer is experiencing a change from a ‘buy now, pay tomorrow’ culture to a version of ‘save now to buy tomorrow’. This enforced culture change needs to be tolerated and will help steer the UK back from the abyss of its borrowing problem.
The one thing to watch out for going into 2012 is the bond market and the government’s borrowing costs. At the moment we can take full advantage of our AAA credit rating and low borrowing costs. The risk is that the bond market takes this away from us, and the UK needs to continue along its path of reducing borrowing to avoid a full-blown debt problem.
We believe GBP/EUR will head higher to 1.25 into 2012.
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