The Global Currency Investor A Quarterly Analysis of 50 World ...

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Jan 98Jan 00Jan 02Jan 04Jan 06Jan 08Jan 10COUNTRY REPORT: UKOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AAA Stable Aaa Stable0.50% 0.95% 1.37% 2.43%Economy and Market OutlookThe UK economy has recently suffered from moderation in the global environment at a time of fiscaltightening. Growth forecasts are being downgraded as consumer confidence and the housingmarket remain muted and business surveys have retreated from the cyclical highs. With thenecessary fiscal tightening, the recovery is likely to remain sub-par. Export orders have declinedfrom the highs despite the currency, on a trade-weighted basis, having shown little improvementsince early 2009 after the sharp decline during the financial crisis. The level of the currency hasunderpinned growth and should continue to be supportive for export growth but muted domesticdemand and declining investment levels a strong recovery remains elusive. Medium term debt anddeficit dynamics should be positive given the fiscal tightening put in place by the currentgovernment but is likely to mean the unemployment rate remains elevated as the public sectorworkforce declines. This has suppressed consumer confidence leaving consumption muted and hasleft businesses cautious despite an improvement in liquidity levels. Rising inflation has caused realincome levels to fall but the central bank remains unlikely to move towards tighter policy in the nearfuture given the current outlook and an expectation that inflation moderates as we move through2012. Indeed speculation has arisen that quantitative easing may be extended to support theeconomy. Therefore with a period of sub-trend growth and easy monetary policy sterling is likely toremain under pressure on a trade-weighted basis. If tensions in the eurozone subside, allowing animprovement in confidence supporting global demand the UK may benefit through increased exportdemand supporting the currency in the medium term.0.960.940.920.900.880.860.840.820.80EUR/ GBPGBP/JPY (RHS)1651601551501451401351301251201156.05.04.03.02.01.00.0Harmonised CPI y/y %BoE Target Rate %2010 2011 (f) 2012 (f)Real Growth (%) 1.3 1.1 1.7CPI (%)* 3.3 4.4 2.6Current account (% GDP) -3.2 -2.0 -1.5Fiscal balance (% GDP) -10.2 -8.1 -6.2Government Debt (% GDP) 75.5 81.0 84.9FX Reserves*End of Year58.6bnSource: Bloomberg, CitigroupPoliticsPrime Minister: David CameronNext Parliamentary election: May 2015Unsurprisingly for the point in the electioncycle, the Labour party has maintained alead in opinion polls. However, the coalitiongovernment remains committed to fiscalreform and few cracks have yet to appearthreatening the fixed term. The small gap inpolls to the Labour party reflects the lack ofcredible policies of the opposition given theacceptance that finances could not beallowed to deteriorate unchecked.13Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.