As the Sterling is edging away from its 9 month low against the euro, it is still very vulnerable to renewed selling on concerns about its fragile domestic economy.
Yesterday, financial experts warned that Britain is “likely” to lose its AAA credit rating as it seems that there’s another threat of a triple dip recession. The world’s three biggest rating agencies have all put the United Kingdom on a “negative outlook”. For instance, the chief economist at IHS Global Insight predicted that at least one of the three main rating agencies may downgrade Britain this year. Of course, a lower ranking indicates that the country is a risky alternative for prospective investment. Arguably, such recent economic developments can even push up the borrowing costs for businesses.
Merely last week, the National Institute of Economic and Social Research (NIESR) calculated that the British economy shrank by 0.3% in the final quarter of 2012. The Centre of Economics and Business Research (CEBR) is forecasting that in 2017/18, the net borrowing will be around £68billion. This amount is more than double the previous £31billion benchmark. CEBR is describing the UK’s deficit as a “three-parliament” problem, as they believe that austerity could possibly stretch beyond the year 2020.
In a similar vein, the annual CPI inflation stood at 2.7 percent in December. This means that it is currently somewhere well above the Bank of England’s 2.0 percent target. A high inflation could worsen an already weak economy by reducing British consumers’ spending power. CEBR is envisaging that the UK economy will grow by a mediocre 0.5% in 2013 and by 1.2% in 2014. Moreover, the unnerving sterling investors are wary of a probable referendum on Britain’s future membership prospects in the European Union.