Outlook: Sterling supreme

IF THERE is one signal above all others that indicates the British economy is likely to enjoy a soft rather than a hard landing, it is the strength of the pound. Everyone knows that sterling has been gaining ground against the beleaguered euro. But in trade-weighted terms, too, it has been climbing for most of this year, and is fast heading back towards the levels that made exporters squeal with pain last spring and summer.

It is hard to see any relief on the horizon for British manufacturers. The latest GDP figures confirmed that the economy had more or less stalled by the final quarter of last year, and it is likely to remain in the doldrums for the first half of this year. Trade in goods and services has weakened.

Yet this is pretty mild as downturns go. The Bank of England has cut interest rates decisively in response to early warnings of weakness. The Government's financial position is sound, in a dramatic turnaround from the mid-1990s. The new monetary and fiscal policy framework has won trust in the financial markets.

What's more, it is hard to think of anywhere else investors might want to put their money. Euroland is slowing, with GDP in Germany and Italy in outright decline. The Nikkei in Japan has come off the bottom quite dramatically since the start of the year, largely in response to foreign interest, but few would bet the Japanese economy is out of the mire yet. Much of the emerging world economy is in recession. There is the American juggernaut, of course, but many investors already hold more in US assets than they might think wise in other circumstances.

So the strength of the pound is half a signal of confidence in the British economy, half a thumbs down for much of the rest of the world.

Whatever the balance of explanations, neither points to any exchange rate weakening on the horizon. Nor is there a lot the authorities can do about it. The strong pound has to be seen as a badge of pride, no matter how unwelcome it is to some exporters.