From the TUC

Sterling to strengthen in 2011

11 Dec 2010, by in Economics

Barclay’s Capital forecasts that Sterling will strengthen against all the major world currencies in 2011. The bank predicts that Japan will return to deflation, worries about sovereign debt in the Euro zone are not going to go away in the near future and that the USA will follow a weak dollar strategy. They also like the cut of David Cameron’s jib – they think that currency and stock markets will be impressed by the deficit reduction plans. As a result the pound should rise by about 25 cents against the dollar compared with its current position and about 7 or 8 per cent against the Euro.

I wrote yesterday about the latest trade figures – the Office for Budget Responsibility thinks that net trade is going to make a significant contribution to growth over the next few years. I thought the OBR was being optimistic and this news makes me even more worried on this score. Because one of the reasons why exports have been growing over the past year is the collapse in the value of Sterling since the start of the global financial crisis. With interest rates hardly above zero, its going to be hard for the Bank to maintain competitiveness if other currencies weaken.

Next year I expect wages to pick up a bit – we’ll have had a year’s recovery and some employers are reporting skills shortages. If the BRIC economies continue to grow there’s likely to be pressure on the prices of raw materials. And of course there’ll be the impact of the VAT increase on prices. All this could mean there will be a lot of pressure on the Monteary Policy Committee to raise interest rates – but if they do they’ll turn the possibility of the appreciation of Sterling into a near certainty.

Next year is going to be extraordinarily difficult. There’s a real risk that deficit-cutting Europe will make a negative contribution to global expansion and the same goes for Japan. Obama’s fiscal stimulus is nowhere near as strong as his domestic critics would have us believe. This means that the global recovery, which seems fairly strong at present, will face a difficult time.

There is still a good chance that a strong international recovery will stimulate domestic demand and that we will avoid a “double-dip” recession. (We might still suffer a jobless recovery, but that is another story.) However, its also a possibility that Sterling could be too strong but inflation too high for us to do anything about it – and that’s a combination no-one can be looking forward to.