Guess which were the two worst-performing major currencies in 2010. Go on… Yes, the pound and the euro. Sterling is actually ahead by 5% but only because the euro has been such a dog. A case of the blind leading the partially-sighted. A coincidence of timing means that the pound has lost two and a half cents to the euro over the last month but if the two snapshots had been taken five days earlier sterling/euro would have looked unchanged.
Sterling was beset, through December, by a series of uninspiring economic statistics and unhelpful news. A steady stream of house price indices showed home-owners becoming less wealthy with every month that passes. Mortgage approvals are running at little more than half the pace of what used to be considered a “normal” month and pundits are hardly offering a hostage to fortune when they predict more of the same in 2011.
The chancellor’s pledge that private sector employers will hire those laid off from the public sector has already suffered two major setbacks. Although jobless claims fell by -1,200 in November the figure disguised the loss of 33,000 jobs in the public sector. Net hiring over the same period by private sector firms was zero. The Chartered Institute for Personnel and Development rubs salt into that wound with a report published in late December. It says unemployment will rise to a 17-year high with 120,000 job losses in the public sector next year and 80,000 laid off by the private sector. The CIPD foresees a “jobless recovery” in Britain similar in style to the one that is going on in the United States.
Even the inflation figures were a mixed blessing. At 3.3% in November it was yet further beyond its theoretical 1%-3% target range. In normal times that would imply an increase in interest rates, a good thing for the pound, but that seems not to be the way things happen nowadays. The latest survey shows that the man in the street believes prices will rise by 3.9% next year and investors are becoming increasingly worried that he may be right. They believe the Bank of England has taken its eye off the ball, that it is less worried by inflation than it is about the risk of higher interest rates stifling growth. At a more basic level, the 1.5% interest that an investor would receive on a one-year sterling deposit turns into a 1.8% loss when 3.3% inflation is factored in. It isn’t a compelling case for the pound if rates are to remain low as inflation rises.
Not that those investors are ecstatic about the euro. Having come last in the 2010 Currency Stakes – and by a long way – its immediate future is no brighter. Greece and Ireland have been rescued at a high cost to the residents of the two countries and to German taxpayers who shouldered much of the cost. At a summit meeting in December European leaders agreed in principle to the formation of a permanent crisis management mechanism to replace the cobbled-together European Financial Stability Fund (EFSF). The details are necessarily vague and the scheme will not come into operation until 2013. Until then the EFSF will have to soldier on, collecting whatever casualties fall in its path.
As for which casualties those casualties may comprise, there are several candidates. A pattern emerged after the first two bailouts. The Athens government, laid low by its huge mismatch between government spending and tax receipts, was a traditional bankrupt. Initially it denied any need for a bailout, reluctant to swallow the potentially onerous terms that would accompany it. Then it caved in and took the loan. Government spending was slashed and wages cut. The situation in Ireland was only slightly different. The government there had promised to guarantee all deposits in Irish banks. Irish banks had lost squillions on loans to property developers and investors. The Irish government exhausted its coffers to substantiate its guarantee. It denied any need for a bailout, reluctant to swallow the potentially onerous terms that would accompany it. Then it caved in and took the loan. Now Portugal is denying any need for a bailout and Spain, saddled with the same burst property as Ireland, is keeping a close eye on how things progress.
Financial predictions for the new year are always a hostage to fortune but let’s offer one anyway. Sterling will go up. It might not go far and it might not stay up but it will trade at a higher level in the new year than it begins it.