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Cantillon: Like the UK economy, the euro zone is weak and, like BoE, the ECB is pumping billions in

about 8 hours ago
Updated: about 3 hours ago

Sterling is sick, but the euro is lying beside it in intensive care




Economic forecasts are often wrong. Yet slowly but surely the predictions of a quick economic hit to Britain after the Brexit vote look like coming true. A string of data this week may give some concrete indication, but even if they are mixed, all the forward confidence indicators are pointing in one direction. The UK economy is heading either for a recession or for a period of very low growth. And beyond that all the much-discussed uncertainties remain. There is simply no reason to think that Britain’s negotiations on new trading relationships with Europe and the rest of the world will be anything but prolonged and hugely difficult.

For the Irish economy there are two immediate sources of threat. One is the impact here of slower UK growth. The second is the value of sterling. The immediate reaction to the Bank of England decision to cut interest rates and expand its programme of quantitative easing was, predictably, to weaken the UK currency.

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With the euro trading below 87p sterling, this it tricky territory for Irish exporters. Sterling did spend much of 2012/13 at similar levels, but for the last two years the euro has traded at 80p or less.

Just now, the mood towards sterling is negative and a lot of investors are betting it will go lower. In the short term Tuesday’s UK July inflation figures will be a guideline, with the annual rate expected to come in at around 0.5 per cent. Any higher may cause a dilemma for the Bank of England in terms of further monetary stimulus, as it will not want inflation to go too high – and could support sterling. Any lower than the expected level and the UK currency could well weaken.

There may be one consolation for our exporters, however. Sterling is sick, but the euro is lying beside it in intensive care. Like the UK economy, the euro zone is weak and like the Bank of England, the ECB is pumping billions in to try to revive inflation. Sterling could weaken further against the US dollar, but so could the euro. Analysts are divided on what this will mean for the crucial euro/sterling exchange rate, but it is by no means a one way bet in the slow bicycle race between two sick currencies.