Currency Watch: The good, the bad and the economy

This week has provided a succinct snapshot of the problems the UK economy faces over the coming months.

Firstly we saw that Consumer Price Index (CPI) inflation slipped by the most significant amount since April 2009, as clothing and food costs were cut in December to try and tempt people through the supermarkets’ doors. CPI currently stands at 4.2% and fell from 4.8% in November.

There will be a few months’ disconnect between the falling inflation number and rising retail sales and consumer confidence. We must bear in mind that there are still pressures in both the jobs and credit markets which will hurt spending, going forward.

This inflation number is positive, but 2012 is still going to be a difficult year and as a result we believe this galvanises the Bank’s argument for further quantitative easing. Expect that to come down the slipway in February.

Unemployment rose to the highest rate in 16 years on Wednesday, with the International Labour Organisation (ILO) rate now coming in at 8.4% compared to 8.1% through August.

The government has explained this as a result of the austerity cuts, but also attributed some of the blame to the negative impact of the Eurozone crisis.

Its critics have said that this is an indication that the UK’s economy has already slipped into a de facto state of recession.

Indeed, some members at the top of government may have already started to soften the ground for a negative GDP number in Q4.

Chancellor George Osborne, who is currently on a tour of the Far East, yesterday acknowledged that a negative number was “possible”.

Now he could mean that it is “possible” in that is “possible” that I might marry Pippa Middleton (i.e. within the realms of possibility, but seriously unlikely) or, more likely, he is preparing us for a weakfish figure (-0.1% to 0.1%).

We were one of the most bearish forecasters in November with our prediction for Q4 growth figure of 0.1%. It now seems we will be near the top end of things. UK GDP is released next Tuesday.

Jeremy Cook is chief economist at World First foreign exchange