“You cannot spend your way out of recession or borrow your way out of debt.” Daniel Hannan – MEP

httpvh://www.youtube.com/watch?v=d3cNipyMLPY

Britain’s economy has grown at the same pace as previously estimated in the first three months of this year, but the recession that preceded this was deeper than originally thought. Although it has been confirmed that we are out of a recession the economy has declined by 6.4% from the highest in output to the lowest, this was sharper than the 6.3% which was estimated and made the recession the worst in post war Britain.  This came to light when the previously mentioned ONS revised its first quarter economy estimates. This highlights the fragility of the recovery as the coalition government attempts cutting the deficit.

I am afraid the problems don’t stop at that. Britain’s Trade deficit in May hit its widest level since 2008, when Lehman brothers collapsed. Creating fears that exports will not be the answer to a healthier economy. The BOE and the government rely on the weak pound to support growth and make Britain’s exports more attractive, however at these levels (we imported £3.8billion more in goods and services than we exported in May), it seems unlikely. We should be thankful at least that imports were up as this means that demand in the domestic economy is recovering.

Essentially the national income data has shown us that the economy was slowing sooner than thought in 2007 and 2008, at about 0.4%. The peak GDP figure was also lower by 0.3%, so even if the recession was not deeper, it is certain that while it still dived as much as we thought we also started off from a worse place than most believed.

 There are two ways of taking these revisions., we can take the opinion of the Office of Budget Responsibility who believes it must show productive capacity has been lost in the recession, with the economy having less capacity to grow. Or we can hope that they indicate looser monetary policy and – fingers crossed- faster growth.

Naturally this has had a negative effect on sterling, seeing a drop quite rapidly against euro and dollar; a move that we expect to continue through the rest of this week.

I hope I haven’t depressed you all too much, and that you have a fabulous week.

Huge congratulations to my dear friends, Victoria and Ben, who got married on Saturday – I hope the euro rate is not ruining the honeymoon!

Jeremy’s Trade of the Week

This week’s trade of the week is a 50% participating forward. For a seller of sterling and a buyer of dollars, this client took advantage of a stronger pound, hedging themselves over a three month period.

The client was able to achieve a worst case rate of 1.47 which is completely protected and is able to benefit in 50% of any movements in their favour.

This strategy requires no premium, and is also relevant for sellers of sterling and buyers of other currencies. As there is a potential strengthening for sterling in the future, it provides a balanced upside for this potential, while guaranteeing a tight WCR.

Have an enjoyable week