Strong pound to slow down UK growth in 2007

As the British Pound hit its strongest level against the dollar in 14 years, the UK economy is facing a tough year ahead, according to F&C.

"Whilst this was influenced mainly by the falling dollar, the strength of the pound is one factor that calls into question the forecasts for the UK economic growth in 2007" , said Ted Scott, fund manager of the F&C Stewardship and the F&C UK Growth & Income funds. "The sterling's strength has also been supported by a possibility of a third interest rate rise since July 2006, widely expected to coincide with the publication of the next inflation report in February 2007. The strong sterling will strengthen the headwinds for the UK economy as UK exporters take a direct hit and the consumer spending, the main driver of the UK economy, will come under further pressure. The UK consumer is already facing tough times with the prospect of even higher taxes and council rates, increasing fuel prices and rail fares, high food inflation, high levels of personal debt and historically low savings ratios."

"The decline of the sterling reflects the slow-down in the US economy. Although the GDP figures for the third quarter were revised yesterday ahead of expectations, most data coming out of the United States for the last few months has been on the whole disappointing. We have seen 17 successive rises in US interest rates in a relatively short space of time but the futures markets are now expecting the next move to be down. This has undermined the strength of the dollar and its decline has gathered momentum and led to the recent turmoil in global currency markets. So long as any further decline remains fairly orderly then the implications for global financial markets should not be too negative and, indeed, should help the US economy that has a large trade deficit and needs the export market to compensate for the current domestic slowdown. However, so much overseas capital has been invested in the US dollar via its treasury markets that a precipitous withdrawal could have serious consequences" , concluded Scott.