A report on current state of UK economy and prospects for 2010
2010 will be a difficult year for the UK economy. After the deepest recession since the 1930s, the outlook is for a sluggish recovery. Though recovery is welcome, it still leaves the problem of spare capacity, high unemployment and record levels of peactime government borrowing. It will be a difficult tightrope between boosting economic growth whilst keeping borrowing under manageable levels.
The Euro has remained strong during the economic and financial crisis. This is because
Euro banks had less exposure to the toxic mortgage loans which defaulted.
The ECB appears less keen to purse policies such as quantitative easing (increasing the money supply) to boost the economy.
The Euro is increasingly seen as a viable alternative to the US Dollar as a world reserve currency.
The Recovery in Eurozone began quicker than elsewhere such as US and UK.
Despite these factors it is worth bearing in mind, the Euro faces real problems, especially on the periphery of the Eurozone.
Greece is facing a debt mountain of with a government debt of over 110% of GDP. Spain and Ireland's economy also look vulnerable as they struggle to survive the impact of a collapse in house prices.
The Euro looks overvalued. Euro exports are increasingly expensive compared to other currencies. This overvaluation could derail the economic recovery and make the ECB pursue a looser monetary policy to boost growth.
2010 will be a difficult year for the ECB, they have greater concern for low inflation and could be first major central bank to raise interest rates. But, the strength of the Euro could be as much a curse as a blessing and this could lead to downward pressure on the Euro.
2010 could be the year when the Euro's strength starts to change and the currency depreciates.
US Trade weighted index.
The Dollar has been in long term decline since 2000. There was a strong rally at the start of the recession.
This rally was due to the realisation the economic crisis was spreading to the rest of the world, and comparatively, US securities looked relatively attractive.
however, since the start of the year, the US recovery has taken longer to materialise whilst Asia has surged ahead. This has highlighted the long term factors which are pushing the dollar lower. These included:
Source: Federal Reserve of Governors
Unemployment forecasts by Federal Reserve for 2010, 2011 and 2012.
The main problem the US has is the large amount of spare capacity in the economy. Output has fallen 6%, whilst potential real output has continued to grow. This means the US is facing alot of spare capacity and unemployment.
In the US, flexible labour markets mean that it is easier for firms to fire workers. This could mean unemployment could fall faster than in Europe (where unemployment rose slower). But, at the same time, there are still those who fear that the official unemployment rate underestimates the true rate of unemployment because it ignores the fall in hours worked.
To a large extent, the fortunes of unemployment depend on the strength and resilience of the economic recovery. If growth picks up and increases by 4% a year, then there is potential for unemployment to fall quickly.
However if the growth rate is sluggish or even if we face a double dip recession, unemployment could rise further than these forecasts
