Should we prepare for a run on the pound?

Britain’s trade deficit in goods and services unexpectedly widened in December – the goods deficit reached £7.3bn, a 12-month high. That suggests foreign demand is not boosting growth as much as many have been hoping. Retailers had the worst January since the British Retail Consortium’s records began in 1995, with like-for-like sales down 0.7%. That’s a disappointing figure even allowing for the bad weather, said Vicky Redwood of Capital Economics. However, industrial production rebounded in December and notched up its first quarterly increase since the first three months of 2008. That lifted sterling off a near nine-month low against the dollar.

What the commentators said

“Are we Britons forever doomed to facing a trade deficit?” asked Edmund Conway on Since its 2007 peak, the pound is down by 25% against our major trading partners’ currencies, yet the trade balance hasn’t improved convincingly. Indeed, far from boosting GDP, trade may actually have been a drag on it last quarter.

Given that both the consumer and public sector are set to be weak this year, “the only way… to achieve significant growth is for exports to pick up, and that is not happening”, as Michael Saunders of Citigroup pointed out. The trouble is that growth in the euro area, Britain’s biggest trading partner, is weak, and as long as that’s the case the boost from the low pound “may remain modest”.

Might an even lower pound help? Sterling certainly looks more likely to fall than rise. The weak growth outlook may prompt the Bank of England to resume its money-printing and asset-purchase programme. “The clear message” from this week’s quarterly inflation report from the Bank is that “any tightening of monetary policy… is a long way off”, said Jonathan Loynes of Capital Economics.

The eurozone debt crisis also bodes ill. Markets “are taking a long, hard look” at indebted countries, said Simon Johnson, a former chief economist at the IMF. Unless “you can persuade [them] you’re really going to bring the budget under control in the foreseeable future, you’re going to have big trouble”.

Yet a likely hung parliament militates against the austerity measures “the market thinks the UK needs”, said John Authers in the FT. That suggests “more trouble” for sterling. Speculators could well turn on us after cashing in on the euro’s woes, said Richard North on So instead of congratulating ourselves on avoiding the eurozone’s problems, maybe we should be “preparing for a pre-election run on the pound”?

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