Chamber Market Commentary – NIESR paints a very dark picture of stalling UK economy

Member News

GBP – Great British Pound Growth forecasts slashed

The National Institute for Economic and Social Research (NIESR) released a report yesterday that paints a very dark picture of the UK’s economic prospects for 2022.

The country faces lower than average growth and continued high inflation.

While the causes of the rise in inflation may indeed be transitory, in that they are driven by a specific set of issues, that cause is expected to continue for a considerable time, possibly the whole of next year.

While demand is outstripping supply across most areas of the economy, following the country’s emergence from Coronavirus lockdowns, the effects of Brexit are yet to be fully felt.

The economy had come to rely on workers from the EU, despite the message from Brexiteers that they were the cause of high unemployment in the lower paid sector.

The country faces a peak in inflation at 5% next year, while following the continued recovery from the pandemic, growth is likely to falter in subsequent years.

Supply issues that have become more pronounced as the recovery has become more robust are likely to continue and be exacerbated by Brexit.

A director of the NIESR commented that the institute believes that the Government is getting the management of the economy wrong, and this is a result of years of underinvestment in the areas of housing, infrastructure, and training. This is particularly prevalent outside London.

Stuttering growth will be brought about by the unwillingness of households to spend the savings that have been built up during the Pandemic. Growth in the housing market is likely to fade with the withdrawal of the stamp duty holiday no longer providing a false impression.

Rising interest rates and the unavailability of longer-term mortgages at preferential rates will doubtless bring about a correction that follows through into the wider economy.

The pound reacted poorly to the NIESR report. It fell to a low of 1.3524, closing at 1.3559.

USD – United States Dollar
Producer Prices up by 8.6%
The cost of goods at the factory gate rose by 8.6% last month. While this is a record, it is the same rate as in the previous month and could be seen as the beginning of the levelling off of wholesale prices.

The Administration, fresh from the passing of a $1.2 trillion bill to help regenerate infrastructure, believes its plans will contribute to improvements in logistics that are plaguing the economic recovery.

The White House appears to be in a state of indecision over the future of Fed Chairman Jerome Powell. If there was no issue, it is certain that the announcement of Powell’s re-election would have been made by now.

There is another name that is being mentioned increasingly and that is Lael Brainard. Brainard has been a member of the inner core of Fed officials for some time and has been mentioned as a possibility for several senior positions. She was formerly responsible for international relations and is now seen as a steady hand.

As a member of the Governing Board at the Federal Reserve and a permanent member of the FOMC.

She has a reputation of being tough on governance, a subject that Democrats in Congress are particularly keen on seeing tightened up.

She has been interviewed by President Biden for the role, and a decision is possible before the end of the month.

Following hot on the heels of the Infrastructure Bill is the build back better Bill that has been championed by Treasury Secretary Janet Yellen.

In an interview yesterday, Yellen spoke of the long-term need within the economy of legislation that provides stability for the economy. She believes that jobs remain fairly easy to come by despite the continued fall in the employment rate, which reached 4.6% in October.

She feels that there has been underinvestment in the domestic economy as manufacturing jobs have been relocated overseas and too little is being done to reverse that situation.

The dollar index is suffering from a short-term fall in risk appetite as Chinese property conglomerates remain the market’s focus. There is a strong possibility of contagion should there be continued issues in that sector.

The index fell to a low of 93.87 yesterday and closed at 93.97. Support below this level is fairly strong, and a test of the 93.50 area is unlikely.

EUR – Euro
Weidmann’s successor speaks
Isabel Schnabel is considered a strong candidate to be the next Bundesbank President.

While that would see her have to give up her current role at the ECB, which is a more senior role, given the likelihood that the next ECB President will be German, it would place her in pole position for that role.

She spoke yesterday of her fears about a bubble that may be developing in the property sector, given the continued additional support that is being pumped into the Eurozone economy and the prospect of continued historically low-interest rates.

While Schnabel is considered to still be tough on inflation, her more recent comments have been more understanding of the plight of the less-affluent nations of the region.

However, her concerns over house prices appear to be directed at the wealthier nations of the Eurozone and while a bubble, or its aftermath, could damage investor confidence its overall effect would be far less than a rise in interest rates would be for countries struggling to emerge from the Pandemic.

Schnabel showed her true colours by commenting that were house prices considered as part of the overall inflation data, the current level would be around 0.5% higher.

It is doubtful that such a change would have any effect on the ECB’s inflation policy, which is allowing prices to rise as growth and activity are encouraged.

It would doubtless be more interesting to Christine Lagarde and the more dovish members of the ECB Governing Council if data were produced which showed how much lower inflation would be, were it not for the continuing bottlenecks that are being seen in supply chains.

The euro benefitted from a weaker dollar yesterday, rising to a high of 1.1608 and closing at 1.1595. There is little interest from traders to take the euro any higher since the divergence of monetary policy is likely to weigh heavily on the single currency.

For more information and advice on mitigating risk that affect currency/market schedule a call with Christopher Smith.