by Mike Dolan
LONDON (Reuters) – Whatever New Year the eurozone economy got from slumping natural gas prices, the UK has seen none of it – showing how bizarre Britain is about deflation there and the mounting pressure on the Bank of England.
January business surveys from around the world on Tuesday saw economic activity in the eurozone expand again for the first time since June – helped by an unusually warm winter that saw natural gas prices halve over the past six weeks.
Although Britain saw the same decline in wholesale energy prices, British industry – by contrast – continued to contract this month. In fact, it shrank at its fastest pace in two years, with everything from inflation and high interest rates to worker shortages, serial labor strikes and the damage of Brexit being blamed. The pound suffered its biggest one-day drop against the euro on Tuesday in more than a month.
And even if you think surveys can be misleading from time to time, the Confederation of British Industry survey of manufacturers doubled down on the message and showed weak order books this month despite easing cost pressures.
Whatever the exact reason behind the ongoing gloom, it leaves the central bank in the lurch as it tries to rein in still double-digit inflation and record private sector wage growth without drowning the housing-sensitive economy in the mud.
The Bank of England meets again next week and there are growing calls for it to start winding down its year-long campaign to raise interest rates, which has already raised its main policy rate to 3.5% from just 0.1% in December 2021.
Whatever the merit of these calls, most forecasters expect the BoE to press for the time being. More than two-thirds of the 42 economists polled by Reuters this month expect another massive rate hike of 50 basis points to 4% next week, while their median “final rate” forecast is for another quarter-point increase to 4.25. % Then.
Financial market pricing is more aggressive. Despite the economic chaos, the Bank of England’s implied peak rate derived from money and exchange markets shows almost another full percentage point of hikes to 4.5% before the bank calls it quits later this summer.
What state the economy will be in by then is anyone’s guess.
But the big outliers in the forecasting world feel that the already waning consensus within the Bank of England’s policy-making board could see tightening stop much sooner than the herd imagined. Two of the nine voters – Silvana Tenero and Swati Dhingra – voted to leave rates unchanged last month, arguing that the policy tightening so far was “more than enough” to get inflation back on target.
HSBC economists Elisabeth Martins and Simon Wells this week stuck adamantly to their call that the Bank of England has only a quarter-point increase in the tank next week, then it’s finished and westernized by 3.75% – nearly 75 basis points below market rates.
one and done?
Although they acknowledge the BoE’s concern about still-tight labor markets and increasing wage growth, they insist that policymakers are changing their stances, interest rate hikes will be delayed last year, and the BoE’s standing forecast is for inflation to fall below target over the course of the year. next couple. Years. HSBC’s team told clients, “Rising interest rates affect the economy for long and volatile periods – the impact of this cycle is just beginning to be seen.”
It’s a big call – encouraged by the weak business readings for January and the massive overshoot in government borrowing last month.
One counterargument from HSBC’s main rival Barclays – which sees another half-point rate hike next week and a final rate of 4.25% – is that this week’s polls have not been enough to “materialize” the labor market, the all-important price metrics so far and the sector. Services readings were “only modest deflationary”.
Either way, the end result leaves the Bank of England and the pound sterling in a state of half-way.
Which way to jump sterling – watch the euro amid a sudden rejuvenation of the euro economy and more hawkish ECB, or track the dollar lower amid similar negative US surprises and the prospect of another Fed rate cut rising to a quarter point next week?
Perhaps it is left in the middle of the Atlantic somewhere – in contrast to the country’s growing political and economic situation.
Stephen Jane, hedge fund manager at Eurizon SLJ, believes the UK’s post-Brexit direction – or lack thereof – remains difficult to determine.
“I remain at a loss as to why (Prime Minister Rishi) Sunak seems busier in signing defense agreements than trade agreements. The cyclical and structural failures of the UK by the post-Brexit government are evident.”
Jain thinks the UK could see a greater parallel in the US economic constellation of dual trade, external deficits and a shrinking workforce. But in practice, it is likely that Sterling will be stuck in the middle of what is likely to be another 10% decline in the dollar more broadly this year. “I suspect that if the dollar continues to fall, hypothetically the pound should rise even though (the pound) may underperform the euro.”
The opinions expressed here are those of the author, a Reuters columnist.
(Written by Mike Dolan, Twitter: @reutersMikeD; Editing by Andrea Ricci)