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Tuesday, 25 August 2009

Sterling: Euro trash

If you are returning to the UK from abroad this weekend after spending all of August on the continent, it isn't all bad news. Sterling is at a 10 week low against the euro after falling consistently through the month of August, so any remaining euros that you have in your pocket will buy you more pounds than you spent to buy the euros at the start of the month.

The rest of the news is bad.

There have been some positive signals in the economy, and we are no longer in the la-la green shoot spotting land of improving second derivatives, but into the world of upward slopes of financial measures. The trouble is that those upwardly trending indicators are not hard figures but straw polls amongst chartered surveyors (read property salemen) and purchasing managers. There is a naturally optimistic survivor bias amongst purchasing managers. Those working for companies that are doing badly are morely to be sacked if there is less to purchase, so there will inevitably be more purchasing at companies that are surviving.

The reality of secong quarter UK GDP is that it fell by another 0.8%. If on the other hand you stayed on the continent you might have noticed the economies growing at a 0.3 per cent quarterly rate. That is a difference of 4.5% over a year.

The pound headed south at the beginning of the month when the Bank of England increased its quantitative easing programme because the economy was not growing. It wasn't helped when the tax receipts for the month of July came in much lower than last year, putting the deficit higher than UK government plans and the level anticipated by the markets, which is why the British currency is faring badly against the euro.

On the other side of the channel, Ms Merkel says she has ruled out tax rises to close Germany's budget deficit, which although much smaller than UK's deficit, will be 6% next year. I like that. None of this "no plans to raise taxes" nonsense. You know where you stand. No wonder their economy is doing so much better.

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