A UK Economic Recovery May Be Just Around the Corner

The UK has finally reached the growth indicator threshold on ten-year gilts. Exceeding the threshold of 95, the gilts rose to 95.26 in the week ending 12 July 2013. After a month-long decline, this rise was a breath of fresh air.

UK Pound rises against U.S. Dollar

Ben S. Bernanke, Chairman of the Federal Reserve, surprised the world by announcing that the U.S. economy is in need of a continuing stimulus package. On 10 July, Bernanke indicated that the current policy of monetary accommodation would move forward for an indefinite period of time.

A dollar selloff in the global market was not the only result of Bernanke's unexpected statement. The Pound Sterling reacted to Bernanke's words by rebounding from a 9 July three-year low of $1.4816, rising to $1.5103 on 12 July. This was simply Bernanke's answer to a question posed subsequent to a Cambridge, Massachusetts speech. However, the assertion was taken seriously in every corner of the world.

The rise in the pound was attributed mainly to Bernanke's off-the-cuff assessment of the need for an ongoing stimulus in the U.S. economy. However, a second positive factor arose simultaneously with Bernanke's gift of words. That additional factor involves a welcome upward turn in the 1.75% gilts, which mature 09-2022.

Negative Variables

As of 11 July, the year has seen an overall drop in UK gilts of 3%. By contrast, German securities decreased 1.1%. It appears clear that the sterling has been weathering a storm this year.
As to the strength of the pound, there has been a 2% drop in value during the first half of 2013. A fairly stable and consistent U.S. economic recovery has led to a 6.4% increase in the dollar's value. By comparison, the euro has risen 5%. The week of 12 July saw the pound decrease 0.2%, closing at 86.36 pence against the euro. These statistics merely highlight the long road ahead for the recovery of the UK economy. Economists appear to be cautiously optimistic regarding the short-term prospects of the sterling.

The Bank of England, after welcoming its new Governor Mark Carney, reiterated that the UK economic upturn continues on an unsteady path. The viewpoint of the central bank is that the fledgling recovery is being assaulted by the increased rates of interest in the market.

It appears that Carney will lead the BofE toward a heightened policy of governmental stimulus. The speculation is that such a policy will force the pound to return quickly to its weakened status.

However, there are many variables at hand.

One of those variables is the ability of the U.S. to maintain a financial position of growth. Bernanke, while not addressing that issue directly, has indicated in his unexpected 10 July statement that the waterway of recovery for America is neither smooth sailing nor a foregone conclusion.

Global analysts clearly presume that the U.S. will continue on a path of unfettered recovery. However, if that does not actually materialize, then the UK Pound will strengthen further against the dollar.

Supply Side of the Recovery Equation

The picture of UK manufacturing was widely expected to exhibit healthy and steady growth. However, in lieu of the 0.4% increase that had been generally predicted, there was a surprising drop of 0.8% in May, continuing a pattern of declining production.

Manufacturing growth must occur if a strong UK recovery is to take place. An accommodative monetary policy cannot single-handedly lift the economy into a successful long-term upward climb.

In the event that consumer and business confidence return to the economic spectrum of the UK, demand will rise to bolster the economy, but without a comparable increase in supply, that demand will simply lead to consumers butting heads against one another for the goods available, causing prices to rise and the damage of inflation to set in.

Every cog in the wheel must be sturdy for the longevity and success of that wheel. Likewise, the world of economics will not see a monetarily healthy UK until each of the elements necessary for recovery and continued growth are fully functional.

The Globe as a Single Entity

International competition is alive and well in the sports arena. Turning the global coin over to view the landscape of economics, however, we find that the monetary ill health of one country has vast adverse effects upon the other nations of the world.

Portugal and Spain, both with a litany of political and financial stressors, directly impact the stability of the euro. Germany dictates a strict fiscal programme for Greece, which is experiencing a major economic disaster. America's severe downturn led to the worldwide economic crisis that began in 2008 and has not yet completely abated.

The Australian Dollar and Swiss Franc appear to be swept up in a downward spiral, with ever-diminishing strength. Switzerland, in its purchase of massive amounts of euros to bolster that currency, apparently did irreparable damage to its own franc. The world has indeed become a single unit.

Thus we see countries such as Russia and America referring to each other as partners. The oneness of the globe is perceived as heartening and healthy.

As to the UK, an economic rebound will bolster the financial position of Europe and bring the world economy a step further toward erasing the negative impact of the global monetary crisis.

Housing Market in the UK

On 15 July, the Ernst & Young Item Club heightened its UK economic growth forecast. Housing prices are rising and the Bank of England has eased the credit supply. The easing of credit is bolstering real estate demand.

In forecasting that the UK economic growth will increase at double the rate previously predicted, Ernst & Young cited various factors that exhibit a strengthening economy. Analysts attribute the brighter forecast to a rise in worldwide monetary stability along with an increase in England's gross domestic product and other national elements such as a construction revival, all pointing toward an economic upturn in the UK.