Even though it seems that the pace of the global recession is starting to slow down, the U.K. economy might continue to struggle during the upcoming periods.
The main reason of worry is that the U.K. economy cannot afford to spend anymore, as the outlook on public finance is getting incredibly grim. During the last weekend, the Treasury said that the government is building provisions to cover the losses stemmed by the financials’ rescue package. Up to now, Britain is the first to admit that the taxpayers will support to banking system losses, even though more countries decided to invest funds in the banking system.
Treasury officials avoided providing an exact value for the government’s provisions, but it is speculated that it will be as big 60 billion pounds, or $87 billion. By these numbers, the U.K. deficit is being forecast to reach 11%, the biggest deficit on record.
“Such a big deficit puts immense pressure on public finance,” TheLFB-Forex.com Trade Team notes. “Most likely, the central bank will have to intervene somewhere in the future and buy gilts, something that will probably make inflation run out of control in the medium to long term.” they added.
“Additional pressure will come from the fact that the government now has its hands tied, since it cannot spend its way out of the recession as has been tried already. If things get worse in the real economy, the U.K. economy is likely to sink to very deep levels.” TheLFB-Forex.com Trade Team said. “We have to note that almost every major recession has had a period when things appeared to improve, but then suddenly the downturn intensified.”
Returning to the currency market, the pound plunged 250 pips today, being one of the worst performers of the day together with the aussie. Moreover, the pound broke below the trend-line that held, until now, the upside trend. If institutional traders shift their focus to the poor state of the U.K.’s public finance, the pound might lose ground rapidly compared with the other major currencies.