Having seen the pound slide dramatically against the Australian dollar since the beginning of the year, we have now at least witnessed a halt to the decline. A new low in the interbank market of A$1.62 was recorded in March, as investors shunned the pound following concerns over the size of the UK’s public borrowing deficit.
Sterling has been further hindered by the results of the most recent opinion polls, which are now showing that the Labour and Conservative parties are neck-and-neck in the run up to the general election, due to take place on 6 May. The fact that a hung parliament is a distinct possibility means investors will remain fearful about how exactly a coalition government will be able to make the necessary changes required to bring down the country’s debt.
The UK can at least boast that it is no longer in recession, having returned to growth during the last quarter of 2009. Although the unemployment rate is high, it has remained just below 2.5 million for some time now and is far less than had been predicted at the height of the credit crisis.
We can expect a slow and fragile improvement in the UK’s growth prospects. There may be many painful months ahead, especially after the necessary spending cuts and gradual tax hikes needed to reduce the country’s debt – which are likely to be inflicted on the economy in the latter part of 2010.
Whilst the UK struggles, the Australian economy has gone from strength to strength. The global recovery in the demand for commodities – driven mainly by Chinese consumption – has meant that Australia has been extremely well positioned to be a major benefactor (owing to its vast quantities of natural resources). This has, in turn, led to much inward investment helping to drive down the unemployment rate – but at the same time increasing labour costs.
To counter these inflationary pressures, the Reserve Bank of Australia has had to raise its base rates yet again to now stand at 4.25%. More hikes are expected in an effort to ensure that its economy does not overheat.
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