Beyond Currency

Several reports have been released by NGOs, financial institutions and investment houses providing their prognosis for the UK economy over the next twelve months.

The verdict is consistently dire, with no one seeing any reason to doubt the Governor of the Bank of England’s forecast that the economy will fall into a fairly deep and long recession which will last at least five quarters beginning in the fourth quarter of 2022.

The economy is clearly facing a number of factors that are difficult to ignore. First, inflation continues to appear to be out of control despite two of the main contributors to headline inflation; Forecourt fuel prices and the wholesale cost of gas beginning to fall.

The price of gas has fallen to a level not seen since the war in Ukraine started, while the forecourt price of a litre of petrol has dropped to around 150p as the oil price hovers around $80 per barrel.

However, as the Bank of England continues to hike interest rates, mortgage payments will continue to rise, while the new financial year will bring increases in council tax driving core inflation higher.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

One of the major issues of the Pandemic and Brexit has been the gradual demise of the High Street. It is estimated that 450 shops per day, of all sizes, closed during 2022. Another reason for the closures has been the rise of online shopping.

The British Retail Consortium has complained to the Government that they are not competing on a level playing field with online retailers, although there has been a great deal of if you can’t beat them join them from medium-sized retailers.

Quite often, the bricks and mortar shops are not beaten on price, but convenience and the ancillary costs of visiting high streets or shopping malls.

As we enter a new year, this is a phenomenon that looks irreversible as local authorities continue to increase business rates and costs of parking and public transport.

The Government has failed abysmally in agreeing free trade deals with its major partners since Brexit. They report that agreements in place with 63.1% of the country’s partners. However, no trade deal is in place with the U.S. despite an application being made in 2021.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

Brexit was never about economic independence. Voters were swept along on a tidal wave of jingoism and promises of how much better life would be if the country was free of the shackles of Brussels.

Now, coming up to seven years after those shackles were broken, even the most ardent Brexiteer must be doubting the benefits of leaving. For the man in the street, there has been no discernible benefit.

Yes, it is true that the United Kingdom would have faced increasing pressure to join monetary union, but in reality, it was only a misplaced sense of historical significance that precluded the country from adopting the single currency.

Now, that ship has sailed, and it is only a matter of conjecture whether from an economic perspective it was the right decision. There is already some consideration being given to closer ties and even having a Swiss style relationship, where in exchange for a contribution to the budget, Britain would become members of the single market.

Although such a suggestion has been dismissed out of hand, by the current administration, it may be a policy that is looked at more closely further down the road.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

The fate of Sterling in 2023 doesn’t rest entirely in the hands of the Bank of England.

Despite further interest rate hikes being made by the Central Bank, Sterling is expected to fall as the economy slips into a recession and possibly sees stagflation as the rate of inflation levels off but fails to fall in any meaningful way.

There have been very few benefits that have been apparent from the country’s decision to leave the European Union, with small and medium businesses still tied up in the red tape that has, if anything, been worsened by the mish mash of agreements that place them at a severe disadvantage to their EU domiciled competitors.

That is unlikely to change much in the coming year, as the Government remains unclear about how it handles the flow of goods into Northern Ireland.

One of the reasons inflation has continued to rise is the continued lack of workers. This is partly due to Brexit as EU nationals who used to work in agriculture and leisure have departed for their home countries, but also due to an exodus of employees from the workforce who have decided to take up offers of early retirement.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

A leading firm of accountants has predicted that the UK economy will contract by 1.3% in 2023. Given the current situation, this appears to be a relatively conservative estimate. 2022 has been characterized by the return of three issues that haven't been seen in a generation, although there is no feeling of nostalgia.

Inflation, political turmoil and strikes have been at the centre, while a downturn of economy and rising interest rates have been the predictable outcome.

After more than a decade when the Bank of England’s independence was barely tested, this year there have been nine interest rate hikes as the performance of the Central Bank has been under scrutiny.

Brexit has not provided businesses with the level of freedom that was expected. The Bank of England has expressed concern about the intended deregulation of the City of London, in particular the ring fencing of bank's commercial and investment banking operations.

The restrictions were put in place to ensure that riskier investment banking operations were funded by capital and not customer funds. Now, in order to promote the City as a centre for innovation in a post-Brexit environment, the Government is seriously considering removal of the regulation, allowing the blurring of the edges of what is investment and what are commercial operations.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

The UK is facing an unprecedented period of industrial unrest as striking railway workers, nurses and ambulance crews as well as airport staff and teachers create havoc that is going to last well into the New Year and beyond.

Striking workers do not accept the Government’s stance over pay and conditions. The Chancellor of the Exchequer, Jeremy Hunt, has told the leaders of worker’s unions that their demands for inflation busting wage settlements are simply unrealistic and unaffordable.

On the whole, the public are adopting a Stoic attitude towards the industrial action, showing great sympathy towards health workers since their performance during the Pandemic is still fresh in their minds, although the degree of militancy being shown by rail workers, who are among the best paid of public service employees is starting to wear thin.

The Bank of England Monetary Policy Committee raised short Term interest rates for the ninth meeting in a row last week. The base rate is now at 3.50%, a year ago it was standing at just 0.10%.

While the recession that has most likely already arrived has been exacerbated by the rate hikes, they have been deemed necessary to combat rising inflation, although their effect has been minimal.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

The Bank of England raised short-term interest rates by fifty-basis-points yesterday, bringing the base lending rate to 3.50%. From the votes cast, it is clear that there is a diverse range of views among committee members.

Catherine Mann sees inflation as the most significant threat to the financial stability of the economy and voted for a seventy-five-basis point increase. Silvana Tenreyro and the newest member of the MPC, Swati Dhingra both saw a recession being made worse by higher interest rates and voted to leave rates unchanged.

Analysts believe that it is healthy to have a variety of views on the committee, provided they remain relative to the current situation and are not synonymous with a hardened view of economic policy.

In her three meetings to date. Dhingra has now voted for a lower hike than was agreed on every occasion. Her ballot may now be considered as a protest vote, and be disregarded by the market as she is considered out of step.

The nature of Governor Andrew Bailey's statement following the announcement was more dovish than has been seen recently. He is clearly concerned about the rate of inflation which is showing no signs of materially slowing yet, and he believes that it is vital that the Government remains firm in negotiations with public sector workers pay demands, but feels that inflation will begin to fall gradually, while the economy has entered a potentially damaging recession.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

The Bank of England’s Monetary Policy Committee will conclude its final meeting of the year later this morning, having raised short-term interest rates at every meeting in a year that has seen inflation continue to rise to a level that has not been seen in a generation.

The Economy has been hit with a perfect storm of factors that have often been out of the control of the Central Bank, but history will decide if the actions that have been taken have been sufficient.

The exponential increase in the wholesale price of gas, the war in Ukraine and shortages of several basic foodstuffs have seen inflation test the mettle of the committee members, some of whom, in spite of raging inflation, have shown misplaced concern about the effect of higher rates on economic growth.

The replacement of arch inflation-hawk Michael Saunders with the clearly more dovish Swati Dhingra, has changed the market’s perception of the seriousness of the Committee’s inflation fighting credentials.

In the two meetings that have been held that she has participated in, she has voted for a hike in rates that is lower than what has finally been agreed.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

The employment report for November was released yesterday. The claimant count rose from a downwardly revised -6.4k to 30.5k. This is a definite indicator of a slowdown in the economy.

As the claimant count rises, fewer people are in work paying taxes while more people are claiming benefits, which reverses the flow of funds into the Treasury.

Average earnings, both including and excluding bonuses, rose but remain below the headline rate of inflation. This means that real wages are continuing to fall and adding to the cost of living crisis.

The economy is being hit by a wave of industrial action across several sectors as workers reject wage rises that are below the rate of inflation.

Train drivers are holding a pair of two day strikes this week, but they insist that their action is about working conditions, although they are also demanding an increase that is close to the rate of inflation.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

The monthly GDP data that was published yesterday showed that the economy bounced back to grow at 0.5% following a 0.6% contraction in September.

Despite the positive data, the economy is still facing a recession that will probably start in the current quarter.

The country faces a significant weakening of its economy this month due to the freezing weather that is engulfing the country, as well as strikes by workers from numerous sectors. Nurses, firemen, ambulance crews, and train drivers are among those who will walk off the job during this month and early next. The Government has drafted in the army to drive ambulances during the strike, while fleets of taxis will ferry people to and from hospital,

Rishi Sunak and his ministers are standing firm as the pressure mounts on them to cave in and accede to the demands of the unions.

The Chancellor of the Exchequer, Jeremy Hunt has said that the size of the claims are unaffordable and if the Government were to agree pay deals in excess of the rate that inflation is rising currently, it would simply add fuel to the fire and start and wages/prices spiral that would be extremely difficult to break.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.