The OECD today forecast Britain was back in recession, with the economy expected to shrink by 0.1% in Q1 2012, following the 0.3% contraction in the Q4 2011.
The grim news poses the question of whether a new sterling devaluation, a new ‘Black Wednesday’ around the corner, now, with investors having warned there may be one on the horizon.
The last time the UK faced a double dip in April 2011, Reuters held the spectre of a sterling crisis with all that meant for the rising costs of imports:
Sterling is very vulnerable to the outcome of the UK GDP figure later this month. This means businesses that import and export are exposed to a great deal of risk when protecting their budgeted rates in foreign exchange for the year.
If the UK does enter a double dip recession on the 27 April, the value of Sterling is likely to fall. Consumer confidence is already near record lows and will plummet further if we see the inevitable media frenzy that would accompany the news of a double dip. The result could be a decline in retail sales and higher unemployment.
However, despite avoiding a double dip last year, the economy has continued to remain weak, meaning sterling has remained vulnerable.
FX-MM magazine reported in January:
Sterling was in real danger of collapse on Thursday after the Confederation of British Industry reported the biggest annual fall in retail sales in nearly three years when Britain was last in a recession.
Meanwhile, the Seeking Alpha investor website also outlined the danger for sterling earlier this year:
The government’s economic strategy is hanging by a thread with very little room for maneuvering on fiscal policy and the UK is at the mercy of global events. Only a further small-scale shock would leave the economy in serious danger, which would also weaken sterling. Without capital controls, the inward flow of funds could turn into a debilitating exodus.
Currency levels, however, are all about relative performance, and with all major currency areas facing severe structural challenges, sterling should be able to avoid severe damage. The most likely outcome is that sterling will weaken against the dollar with a slide to below 1.50, and potentially a move to the 1.45 area during the first half of 2012.
• Economic Update – February 2012: Double dipped 7 Feb 2012
• The double-dip begins 25 Jan 2012
If we do enter a double dip, the possibilities of a new steling crisis, not seen since 1992’s ‘Black Wednesday’, have gone up.
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