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Strength of economic recovery short-term

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Asset management firm Barings has warned that any potential for economic recovery may not be sustainable in the long-term.

It was suggested that the economic recovery in the West - which the firm argued is largely being led by the US - is being muted over the short term by recent tax rises.

The ongoing uncertainty created by the outcome of future fiscal negotiations is also said to be a major contributing factor to this trend.

Barings stated that it downgraded sterling, as there appears to be a high degree of tolerance for depreciation in the currency, which is attributed to the weakness of the UK economy.

Director of forex advisory services at foreign currency exchange brokers HiFX Chris Towner recently argued that sterling is currently weakening on the basis of this kind of negative sentiment.

The expert noted that while a currency comparison might indicate that sterling was weakened against the US dollar and the euro in the past week, claiming this is due to the publication of the latest minutes from the last meeting of the Monetary Policy Committee of the Bank of England.

This data revealed that three of its members - including governor Sir Mervyn King - voted to increase the government's quantitative easing initiative to £400 billion.

Barings said that the primary weaknesses in the European economy are political - despite positive news in the fourth quarter of 2012.

"There are encouraging signs of the benefits of restructuring and improved competitiveness in Spain and Ireland, but France has yet to embark on serious reform," the firm commented.

"We have little enthusiasm for the UK economy, although a weaker pound should be positive for corporate earnings and the UK equity market, which we expect to perform strongly."

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