30th September 09 – Contrary Goldman Sachs
Hardly had the little grey cells stopped bobbing up and down on the pound-to-euro parity prophecy trampoline than up pops Goldman Sachs claiming that currency investors have exaggerated the risk faced by UK banks from the credit crunch. Goldmans went on to say that the currency players had punished sterling because a high proportion of Britain’s overseas assets are in equities. But, they claim, this makes no sense due to global stock markets recovering strongly. Quite a contrary view.
Britain will transform itself from chronic over-spender to a global surplus country as the weak pound revives its export industry: so says a new Goldman report.
Ben Broadbent, the bank’s UK economist, said that the 20% slide in sterling over the past year was “enough to push the UK’s current account into comfortable and permanent surplus.” Such a durable current account surplus has not occurred in living memory. On the back of this theory, Goldmans issued an alert advising its clients to build up sterling positions. The UK economy was in better shape than it looked, with public debt likely to peak at under 80% of GDP – lower than either Germany or France. “The UK data continues to exceed the Bank of England’s projections on the upside. We expect interest rates to rise from next spring.”
One foundation for the positive currency theory is that the UK economy is already expanding at a 2% pa rate and inflation is “sticky” (a new adjective) compared with the rest of Europe. Consequently, Goldmans expect the pound to strengthen and not weaken against the euro over the next three months. It predicts a worth of 84 pence and not 90p as now or £1 as predicted by e.g. BNP Paribas.
As regards reserves for the next rainy day, the amount of cash held by UK based banks in their reserve accounts at Threadneedle Street has reached the equivalent of 10% of UK GDP (5% US, 3% Europe and 3% Japan).
Wow, what a relief.
More at www.jgwalkersmith.co.uk
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