Brighter outlook for exporters
Sunday 28 December 1997
He's seen the forecasts saying sterling will give back some of the 25 per cent gains it's made against a trade-weighted currency basket in the past 18 months. Nevertheless, he's not willing to bet the pound will weaken. "What if it doesn't?" he said. "We can't operate our company on the basis of economic forecasts."
Economists are saying the pound will give back half of the advance it's made since the summer of 1996, as five increases in interest rates this year combine with a deteriorating trade balance to slow economic growth.
"We expect sterling to decline against the deutschmark by a good 5 to 10 per cent from here," said David Thomas, senior economist at ICI. "If sterling should fall 10 per cent in the first half of next year, that should undo not all the damage it had this year, but a lot of it."
Sterling's rise of more than 25 per cent against the currencies of Britain's main trading partners has sent export profits tumbling. After months of cutting margins to keep overseas business, as sterling's strength made UK goods more expensive, companies say they're now losing clients.
The rise in sterling slashed pounds 50m off ICI's third-quarter earnings, cutting its profit for the period to pounds 76m. The company is forecasting the currency will slump as low as Dm2.60 by this time next year, down from its current Dm2.96.
The two main forces that have driven sterling higher this year are beginning to unwind. The country's benchmark lending rate isn't expected to rise much above its current five-year high of 7.25 per cent, while investors see less chance of Europe's plans for a single European currency unravelling before the 1 January 1999 start date.
Moreover, the one prop that's still supporting sterling - the prospect of the Bank of England increasing its base rate by a final quarter-point - looks increasingly unsound. "Another rate rise won't do any good for the currency since it would appear to be behind the inflation curve - and therefore against a backdrop of slower growth," said Francis Breden, currency economist at Lehman Brothers International, who expects the pound to end 1998 at Dm2.60, and as low as $1.55 from the present rate of $1.66.
The IMF expects UK growth to slow to 2.4 per cent next year, down from an estimated 3.5 per cent this year. Slower growth might persuade the monetary policy guardians that they don't need to tighten again.
"We see a scenario of UK growth slowing over the next year," while European growth accelerates, said Tom Barman, fund manager at Rothschild Asset Management. "There should be a correction in the overvaluation we presently see in sterling."
For Bowden at British Steel, sterling's gains to Dm3 in July from Dm2.40 at the beginning of January did most of the damage.
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