In the UK, Industrial Production is set to fall -10.0% in the year to January while Manufacturing Production drops -11.7% in the same period. Dwindling global demand has weighed heavily on British industry and is likely continue to do so as 2009 brings the first global recession since World War II. This suggests firms will continue to reduce capacity and lay off workers, pushing the unemployment rate beyond the 9-year high at 3.8% registered in January. Job losses will weigh on disposable incomes, trimming spending and slowing the pace of economic growth. Indeed, the International Monetary Fund has predicted that the UK will see the deepest recession of all the G7 nations. In an effort to check the downturn, the Bank of England cut rates to a record-low 0.50% and signaled it would pursue quantitative easing. The implications of this could spell trouble for the British Pound. Manually expanding the money supply may prove profoundly inflationary as the eventual recovery materializes, eroding the currency’s value if lending rates do not rise fast enough to drain excess liquidity. Policymakers’ recognition of a rebound tends to lag behind its actual beginning, threatening to put the BOE behind the curve. On balance, this suggests the risks are to the downside in the long term sterling outlook.
