MORE QE ON THE CARDS TO BOLSTER UK

the release of stronger-than-expected US GDP data last week and favourable confidence numbers from the eurozone highlight the position of the UK as being one of the weakest economies in the G10. There is a strong chance that this week’s Bank of England Monetary Policy Committee (MPC) meeting will bring yet another dose of quantitative easing to try to to remedy this situation; a policy which has weighed on the pound since its introduction last March.

Although sterling is considered to be undervalued against the euro, the UK economy has remained in recession while the Eurozone recovery appears to have stayed on track, which suggests that euro-sterling could remain elevated for some months to come.

The substantial cost of bank bailouts following the financial crisis has clearly put the UK economy at a disadvantage to the Eurozone. But it wasn’t just the balance sheets of British banks that were exposed: those of UK consumers are in equally poor shape heading into the financial crisis and the repairing process could hinder consumption and growth for years.

Last week Eurostat reported that the household savings rate (savings as a percentage of disposable income) in the Euro Area stood at 16.5 per cent in the second quarter of 2009 – the highest rate since the series began in the first quarter of 1999.

An increase in the savings rate is natural at this point of the economic cycle and it shows that consumers are looking to protect themselves from the increased threat of unemployment and are saving more to make up for wealth lost during the financial crisis.

In the second quarter of 2009, the UK savings rate rose to its highest level for several years after hitting a low in the first quarter of 2008. That said, there are striking differences between the savings rates of the UK and the Eurozone. The second quarter high in the UK rate is a relatively moderate 5.6 per cent.


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