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Britain’s naked economic frailty could be harshly exposed

Receding political risks elsewhere in the world could thrust the UK into the market glare.

Britain’s naked economic frailty could be harshly exposed

Obscurity and economic mediocrity have their benefits. Threats to the world’s largest economies of the US, the eurozone and China all stole market attention in 2012.

Now though, fears over a ‘hard landing’ in China have largely passed. In the eurozone, where expectations are very low, the threat of immediate collapse has diminished. And the US has overcome the first of its fiscal hurdles, cobbling together a deal to see off sweeping tax rises.

The beating back of 2012’s biggest market threats, economists and political watchmen say, leaves the UK – which has a worsening fiscal profile and economy zig-zagging in and out of contraction – suddenly stark naked, exposed in markets’ peripheral vision.

We’re not as lame, economically, as parts of Europe. But the eurozone periphery has already been through the market rinser, while the UK has not, clinging onto its AAA credit rating and safe haven status. We’ve been let off lightly.

‘The UK’s failings are now more likely to grab attention’, said HSBC economist David Bloom in the bank’s 2013 outlook published yesterday, meaning that the pound’s ‘frailties will emerge from the shadows in 2013’.

While Scotland’s independence bid isn’t being taken so seriously on the world stage, eurosceptics’ siren calls for a split from Europe – and David Cameron’s imminent speech where he’ll address whether there should be a referendum on the matter – is garnering some unwanted attention.

Partly because of this wrangling over Europe, Britain earns a name-check in a list of top risks for 2013 compiled by political risk experts at Eurasia Group. They warn that Britain will become more marginalised in Europe as the eurozone countries play a bigger role. Eurasia Group lumps the UK in with Israel and Japan as the ‘JIBs’, ‘countries impacted most directly and problematically by changes now underway in the geopolitical order’. The trio sit on the margins of major events and aren’t in any position to do anything about it.

Few economists say the UK can survive 2013 with its AAA rating intact (the three major ratings agencies have all recently warned of a cut). Does that matter? It hasn’t always in the past for other countries such as the US, so opinions are divided. Citigroup has warned that a downgrade would heighten political risks and put chancellor George Osborne’s fiscal plans at risk.

Perhaps the scariest warning comes from RBS economist Ross Walker. He is worried about ‘an abrupt and even disorderly depreciation of sterling’ (which though benefiting struggling exporters, would bring a surge in inflation) if 2012’s worsening in the UK’s investment income surplus becomes more permanent and grabs the attention of currency markets.

This provides an ‘amber’ warning light for the pound and market perceptions around the economic health of the UK in general, Walker warns.

But even the more conventional concerns about the UK economy (weak growth, persistent inflation, tough external environment, lack of credit, weak wage growth etc) are proving enough to worry investors. Just under a third of financial advisers believe that stagnant or negative UK GDP Growth will be the biggest challenge to investment growth, according to a survey published today by investment management firm Baring, up by 11% since September.

Unfortunately, even the most upbeat counter-argument to this doom-laden outlook can only muster hopes of a slight improvement in the UK economy. The most optimistic of City forecasters, Goldman Sachs, expects ‘sluggish’ GDP growth of 1.6% this year. Nomura, the most pessimistic, says it’ll be 0.4%.

19 comments so far. Why not have your say?


Jan 08, 2013 at 17:14

Couldn't agree more ... the ConLibs have, and are, playing a mediocre hand, very badly.

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Keith Cobby

Jan 08, 2013 at 17:31

It is all about managing decline. I would have thought a dose of inflation was just what the BoE wanted.

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J Thomas

Jan 08, 2013 at 18:18

As a hedge against a Sterling depreciation and inflation a few hundred gold Sovereigns in your Bank safe have historically been your best friend.

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Jan 08, 2013 at 19:50

Keith ... Decline .... probably but not inevitable ... you need the correct government strategy (none is currently apparent in the areas I examine) combined with a positive culture. The later is difficult and somewhat intangible you need clever and wise leadership.

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an elder one

Jan 08, 2013 at 20:17

Looks like the banks have been truly p****d off by all the flak they've received and are getting their own back!

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Jan 09, 2013 at 07:01

This article demonstrates how difficult it is to make predictions, especially about the future. Even more difficult when the dismal seer states only the negative aspects of the argument. Poor journalism, the usual anti- UK sentiment that is guaranteed to bring out all the Cassandras and Jeremiahs from the depths of their gloomy caves. A few examples already.

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Johnny Anderson

Jan 09, 2013 at 11:31

"doom-leaden"??? Clearly the outlook is bleak if the UK's financial journalists can't even speak/spell their own language properly.

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Chris Marshall (Citywire)

Jan 09, 2013 at 11:44

Doom-leaden typo fixed, thanks for pointing that out Johnny


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Johnny Anderson

Jan 09, 2013 at 13:55

Chris....I hope you took the remark in the (light-hearted) manner that was intended!! No offence meant.

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Ian Lewthwaite

Jan 09, 2013 at 16:16

So we are back to the cut expenditure and raise taxes, perhaps he will start with the offshore companies like tesco, starbucks and many others and base their UK taxation on UK turnover at 20% of their margins, but not using their figures.

If they earn the profit here then pay up or move away - a simple stark choice. Remove the heads of department in HMRC and stop all cosy tax arrangements with mates.(sorry friendly firms)

When I say ALL I mean ALL

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Ian Craig

Jan 09, 2013 at 16:36

I don't really understand the link between equity prices and the value of stirling. If the pound takes a hit, then foreign firms listed in London are going cheap. UK firms, like energy providers must also be going cheap as they sell their produce at international prices plus markup. That seems obvious, but it seems to prove wrong in fact. Where am I going wrong?

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Jan 09, 2013 at 20:13

I agree with you, Ian. There is a global battle going on at the moment for weaker currencies. If you look at countries like Australia they view their strong currencies as a burden and are seeking to devalue by reducing interest rates. However the QE policies of the US, UK and now Eurozone and the monetary policies of China are making it hard for other countries to devalue. Devaluation of sterling could be good for our economy and could boost stock markets.

This is one reason why the article is so one- sided. Others include the fact that UK banks have at least started to sort out their capital problems (the US banks are sorted and have begun to lend again, which will cause their money supply to balloon; the European banks have hardly begun to recapitalise, and Basle 3 is unhelpful). The UK has also started serious deficit reduction, in contrast to the US and Europe. Almost all commentators show some growth for the UK economy in 2013 and better in 2014. And no matter what you think about their politics (I don't care for them) UK Govt is trusted internationally.

Asset prices, currency values, economic growth are all subject to international battles. Most other countries have significant problems, so the future of UK plc is for the moment dependent upon being less bad than the rest. And the reason I object to the article is that we are less bad than most and getting better. Nor is it clear that devaluation of sterling would be at all a bad thing, except of course for holders of gilts. I await an article claiming the gilt bubble is over.

I should add that I am in Australia and the press coming out of the UK paints a sorry picture of self- depreciation which people here find hard to understand.

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Jan 09, 2013 at 20:42

Truth is that journos turn somersaults to create a twist so that they can write something that sounds original. This one is based on the premise that as the world economic situation picks up, we for reasons that the writer struggles to find, will be somehow disadvantaged - and I thought that the underlying problem was growth! Even when the prospect appears you can rely on some experts to gainsay. I am clear that when global demand recovers - and it will -

then handled right ( i.e unimpeded by a Labour government ) we can come out in good shape

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Ian Lewthwaite

Jan 10, 2013 at 09:12

Drake, I think that the biggest problem we have in the UK is a complete breakdown in the faith in our politicians to just be honest, you compatriot murdock brought some with typical Aussie bluntness( I lived there for over 6 years, with UK frozen pension on a 410 Visa and accepted that in Aussie eyes I wasalways the bloody Pom, regardless, we enjoyed the long holiday, and left many Aussie friends and relations, but not the 2009 bushfire in Kinglake)

The politicians in response were feeding the press with what they wanted us to KNOW, to say they were in bed together may be churlish.

Labour as usual spent other peoples money without regard to its effect or cost in their efforts to stay in power by bribing those who couldnt/wouldnt work and opening the floodgates to the world, all trained rocket scientist were were led to believe and plied them with a lifestyle they could only dream of in their own country, whist at the same time shafting our Commonwealth relations and those we owed a duty to for helping us in the last wars.

They have not woken up to the fact that there are billions in the far east who have nearly less than nothing whose sole ambition is to get into the UK, not Europe for the freebies, some are willing to graft but do the UK want them here in the continuing vast numbers- the answer like the Welfare State - we cannot now afford it

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Raymond Hurley

Jan 10, 2013 at 09:52

Chris Marshall gives us another incoherent rant.

Drake on the other hand, gives two concise well structured arguments.

Citywire should employ Drake.

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James Park

Jan 13, 2013 at 11:37

I agree with comments intimating that we have mediocre government.

I my opinion too many important decisions are politically sensitive. If you take, for example, the resurrected debate over our involvement in Europe and the uncertainty it causes, Cameron and Co say any referendum will likely only take place after the next election.

More uncertainty and politics! Simply not good enough.

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Steven Heath

Jan 13, 2013 at 11:54

We need to start looking after the UK , no one else will . Scrap Foreign Aid Budget £12.6 Billion and give it to Pensioners for a start . Trident is just a complete waist , use the money to boost our conventional forces . The Human Rights Act is just a Joke .

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Ian Lewthwaite

Jan 13, 2013 at 16:38

cameron & Co are so hesitant they cannot see that most want to be part of Europe, but without the crap laws, human rights, and the European Court overrulling UK laws, any business doing trade with any country have to comply with that countries specifications on their product ( if you dont believe me -check motor cars).

If they want to apply Green policies which are nonsence and make our goods far too expensive on the world market, but do not contibute one iota to carbon reduction , while at the same time China pollutes mote that many nations like EU, USA and UK together

I think we have managed for a few thousand years without Europe and their constant wars involving the UK. The germans were not happy when Napoleon imposed his civil code on most of europe but didnt quite manage Russia.

I will not accept laws dished out like smarties by any obscure EU Government in which I have no voice ( a bit like the present UK parliament if you consider).

Any Govt who cannot balance its books is living in cloud cuckoo land - the EU have excelled at no accounts for 17 years, would you be a member of a golf club who never balance its income and expenditure? which seems the norm in Football and Western Govts. China you would never know as their figures are what they publish - the truth may be a lot different

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Lesley Holmes

Jan 15, 2013 at 07:28

Government spending is an enormous part of so-called GDP. It is index-linked and therefore it is in itself a contributor to inflation. Index-linking should be related to GDP ex-government spending. This would make sense and help to manage expectations.

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