Why sterling should rebound in 2017

A leading economist argues that unstable politics will not derail a global economic recovery...

Why sterling should rebound in 2017

Olivier Douliery/DPA/PA Images

"On a fundamental basis, I think the weakness of sterling after the referendum result was overdone," Paul Donovan, Global Chief Economist with the Wealth Management Division of UBS Bank told Vincent Wall on Breakfast Business.

He believes sterling is vulnerable to political interventions but it will hold its own against the euro, or even appreciate, during 2017.

"In the near term, politics is not actually going to derail the economic recovery, because politicians are not nearly as important as they think they are," Mr Donovan told Newstalk.

Be believes that despite the high level of political "noise," investors still have faith the UK economy's fundamentals.

However, he thinks that the US under President Trump is exposed to greater economic shocks.

He notes that during periods of political uncertainty foreign investors are more likely to "panic" as they have less of an understanding of the local political climate.

The high level of foreign money in US markets leaves it exposed to greater volatility if his presidency struggles to pass policies such as tax reforms and a new health plan.

The economist expects growth of 1.5% in the euro zone this year and expansion of between 2.25-2.5% in the US.

While inflation will return, he does not believe it is something to be overly concerned about:

"It's not dangerously high inflation. We are talking inflation in the 2-3% range for many industrialised economies. This is hardly Weimar Germany and hyperinflation, but it is certainly higher than we have been used to in the last couple of years."