Currency Watch: 2013 – A year of slow grind ahead

It is predictions time for us economists again and another opportunity for us all to look foolish in the face of the global macroeconomic environment.

If the overall trend of 2012 has been one of economic consolidation then we envisage 2013 to be one of cautious optimism that remains vulnerable to the squalls and tides of the Eurozone crisis.

In our base case scenario the US manages to avoid the “Fiscal Cliff” and sees stable and sensible fiscal consolidation over the course of the following 10 years coinciding with the US consumer reaching back into their pockets and starting to spend again.

This should help drive global growth onwards, alongside the commitments of the world’s central banks to keep policy loose for the foreseeable future. Asset purchases or quantitative easing has drawn criticism in the second half of the year, especially in the UK, as to its efficacy but we expect to see central banks, particularly the Bank of Japan and Bank of England, remain ready to add more “punch to the bowl” should tail risks hurt confidence once again.

Eurozone issues in 2012 stemmed from fears over the divergence between the core and the periphery, the haves and have nots. Spreads on yields between the safe haven Germany and the volatile and unloved Spain and Italy blew higher in the early part of the year before Mario Draghi’s ECB rode to the rescue with details of its OMT plan.

Our fear for 2013 is that although it seems the issues surrounding solvency seem to have passed in the Eurozone following the ECB’s gesture of “unlimited” support the problem of growth will become the new normal. We expect to see Germany and France dragged further into the mire over the course of the year as export markets remain victims of low aggregate demand in the former’s case and from worsening debt dynamics in the case of La Republique.

Our UK outlook is very much the same as it has been throughout the past few years; one of a slow grind, hamstrung by weak trade prospects with key European markets and the balancing act of a contractionary fiscal policy and an expansionary central bank. There is every likelihood that the UK loses its AAA rating from at least one of the primary ratings agencies in 2013 following the government’s inability to self-imposed deficit reduction targets.

We would maintain that, following an initially negative reaction, a downgrade to AA would not be a “gamechanger” for GBP or gilt yields going forward and is more of a political embarrassment than an economic one.

Have a great Christmas and fabulous New Year.

Jeremy Cook is chief economist at World First foreign exchange