After rising against the US dollar for three consecutive trading days on Tuesday (October 5), the pound fluctuated narrowly during the day, stably above the 1.36 level. The UK is facing a very challenging winter as many factors come together. Lack of labor, rising heating fees, and running out of shops are all the reality that the British are currently facing. As winter comes, things may get worse, and the Bank of England (BOE) may have to address inflation. This series of headwinds once hit the pound, but more and more analysts believe that the market's pessimism about the pound will improve with the prospect of central banks leading the rate hike.
The labor market is facing contradictions, and the current situation in the UK is in a dilemma
The cheap labor import model that the UK has implemented for 25 years has been subverted by the UK's Brexit and the COVID-19 pandemic. Faced with workers' shortages, wage requirements and prices, people are worried that the famous "dissatisfied winter" incident in the UK in the 1970s will reappear.
After leaving the EU, the UK was immediately affected by the epidemic. It is now trying to quit its dependence on cheap imported labor. British Prime Minister Johnson's Brexit experiment is unique among major economies, and a labor shortage may be the most urgent of a series of problems facing the UK. Many British companies have been relying on cheaper foreign labor. Labor shortage is impacting every link in the food supply chain. There is a shortage of people who pick/process food, package food, and then deliver food.
(EU and the COVID-19 pandemic push European immigrants to leave the UK)
Brexit aftermath has not yet settled, causing labor shortages and wage increases
Johnson described his Brexit bet as a "adjustment" although opponents said he was disguising the labor shortage as a golden opportunity for workers to raise wages. However, as the epidemic has brought about an economic shock that has not been seen in 300 years and triggered a 10% economic contraction in the UK, policies to restrict immigration are expected to have another impact on the future generations of the UK.
After Brexit, the government no longer prioritizes EU citizens. Brexit prompted many Eastern European workers — including about 25,000 truck drivers — to leave the UK, while around 40,000 truck license testing has been suspended due to the pandemic. The UK is now short of about 100,000 truck drivers, which has led to long queues at gas stations, fears that food will enter supermarkets, and the lack of butchers and warehouse workers has also raised concerns.
The long-term impact of the change in labor import patterns on economic growth, Johnson's political fate, and the intermittent relationship between the UK and the EU is unclear. Johnson, 57, said when asked about the labor shortage: "I will not go back to the low wage and low-skill model that has caused uncontrolled immigration." Johnson bluntly told business leaders at a closed-door meeting to raise workers' wages.
Johnson said: "Our country has been maintaining a relatively low wage growth rate for a long time, with basic wages and full productivity stagnating. This is because, for a long time, we have failed to invest in talent development and equipment optimization, which has led to difficulties in rising wage levels." But he did not explain how to solve the problem of wage stagnation and low productivity through a mixed method of lower immigration and raising wages. People are still worried that this policy will increase inflation and erode real wages. UK economic growth lags behind, but the light of hope remains, and the British Bank is expected to raise interest rates. UK GDP changes from the fourth quarter of 2019 to the second quarter of 2021 are the slowest among the G7. Britain's Brexit policy is believed to have led to the current economic isolation of the UK.
(UK economic recovery is weaker than other G7 countries)
Last month, the Bank of England said, "CPI inflation will rise to 4% later this year mainly due to the development of energy and commodity prices, and the possibility of raising interest rates from historical lows appears to be strengthening. The bank cited evidence that "hiring difficulties have become more common and severe", which the bank attributed to a "combination of multiple factors, including demand recovering faster than expected, and a decrease in EU worker availability".
However, UBS strategist Gaétan Peroux said: "Negative news about various shortages in the UK has hit the pound, but we expect investors' sentiment to be recovering because the Bank of England will obviously tighten monetary policy next year."
It is worth noting that the UK's GDP data released on Thursday showed that the UK's economic growth exceeded previous expectations in the second quarter. GDP grew by 5.5% in the second quarter, up from the initial forecast of 4.8%. This means that the UK's current GDP level is 3.3% lower than before the epidemic in the fourth quarter of 2019, and previous estimates were 4.4% lower.
These progress means that the Bank of England may raise interest rates in early 2022, earlier than other major central banks such as the Federal Reserve and the European Central Bank. Analysts believe this interest rate advantage is a basic source of support for the pound. "We also continue to believe that the attractive investment attributes of the UK and the long-term undervalued pound will become a strong anchor for the pound," said Marek Raczko, foreign exchange strategist at Barclays. Barclays economists raised their growth rate in 2021 by 0.9 percentage points after the GDP data is released, and are currently expected to be 7.3%. Under their new image, the UK economy will return to pre-pandemic levels in the first quarter of 2022, a quarter ahead of previous forecasts.
Raczko said: "We expect the market to focus on long-term fundamentals as a guide to the pound's trend. The weakness of pound last week was inconsistent with a sharp increase in UK Treasury yields (three rates will be raised next year). The long-term undervalued pound will become a strong pillar of pound."
It is unclear how the price increase will affect the UK economy, which is consumer-driven and increasingly relies on supply chains, and the supply chain's tentacles are spread across Europe and elsewhere.
This is a story worth paying attention to. The impact of Brexit and the COVID-19 pandemic are intertwined, bringing a double blow to the UK. These shortfalls should not be so severe, but be aware of the buildup of inflationary pressures, which will force the UK to act quickly on interest rates. This could mean some unusual volatility in the pound in the coming weeks. On Tuesday (October 5), the pound pound fluctuated narrowly against the US dollar for three consecutive trading days, and remained stable above the 1.36 level.
This article is from Huitong.com
