UK’s Long and Winding Road

Yesterday, a downcast King admitted that the United Kingdom’s economic recovery will take longer and tougher than he hoped. The BOE’s latest inflation report revealed a downgrade in growth and inflation expectations, hinting that the Brits could end up singing “Hello, Goodbye” to economic expansion. So much for twisting and shouting over a measly 0.1% economic expansion in the last quarter of 2009…

Aside from that, King confirmed that interest rates would remain low for at least another year and that the central bank is leaving the door open for further asset purchases. After finally ending a streak of negative GDP growth, maybe the BOE is dead-set on staying out of the recessionary waters this time around. Then again, BOE officials are careful not to get their hopes up too high because policymakers foresee that inflation will fall back below their target range in the next couple of years.

Prior to the hearings, it seemed that traders anticipated a possible tightening due to an unexpected spike in inflation in the UK. However, once the details of the inflation hearing hit the airwaves, pound buying came to a screeching halt as investors quickly reversed their positions. Funny as it may sound, the pound received some serious pounding – the Cable sunk to a low of 1.5571 from 1.5727 while the Guppy slid down to 139.47 from 141.07.

And why wouldn’t they sell the pound off? Judging from the results of economic data released recently, the UK could be in dire need of “Help!”…

The most recent report on manufacturing production revealed that UK’s manufacturing sector experienced its worst contraction in almost four decades during 2009. Even if production grew 0.9%, year-on-year, it shrunk by a whopping 10.5%, marking its biggest decline in more than four decades.

In addition, joblessness in UK has been treading the 7.8% to 7.9% level for almost six months now and is projected to edge even higher as the slow recovery drags on. Even if the latest employment situation report showed that unemployment decreased, looking beyond the headline figure would reveal that full-time jobs actually fell and was only covered by an unexpected jump in the number of part-time workers. It seems that the ugly status of UK’s labor market is pushing people to settle for any job at all just to make ends meet…

It’s no mystery that the UK’s economy is still stuck in a rut. Even if the MPC said that there would be no change in interest rates any time soon, they didn’t rule out the possibility of more quantitative easing measures through an expansion of the BOE’s asset purchase program. With inflation expected to fall below the BOE’s target for another two years, policymakers can’t stand idly by and simply “Let It Be”.

Remember though, that the UK is already tip toeing around a very fine line because of all their debt. For now, we can probably expect the BOE to take a wait-and-see approach before making any more drastic moves because… well, “Tomorrow Never Knows!”