During the overall economic downturn, what is the impact of the weak shock of the pound on the development of the British economic structure?
preface
In 2022, the UK experienced a series of political and economic turmoil, such as the announcement of the resignation of former Prime Minister Johnson, the surge in Treasury bond yields and the emergency purchase of bonds by the Bank of England, the overturning of Truss's fiscal plan, and the railway strike.
In this case, the pound sterling as a whole fell in 2022, and fell to a 50-year low of 1.0335 under the suppression of a strong dollar, so how much impact did this volatile market of the pound have on the British economic income?
The market's expectations of the British recession and the shift in monetary policy may not support the strength of the pound, but externally, the Fed's interest rate hike process peaked, the US recession expectations and energy prices, and the continued pressure brought by the Russian-Ukrainian conflict to the euro area will form some support for the pound, and the pound may fall into a weak shock market in the long and short power game.
From the perspective of economic fundamentals, the British economy may fall into recession. The recent release of the Bank of England's monetary policy report and interest rate meeting minutes set expectations for the UK's macroeconomics over the next two years.
Models show that UK gross domestic product (GDP) growth will be -1.5% in 2023 and -1% in 2024, the economy will fall into recession, and manufacturing and labor markets will continue to contract.
From the perspective of economic data, although the UK consumer price index (CPI) is still at a high level of more than 10%, due to the decline in energy prices, the CPI data of 10.7% in November 2022 has been better than market expectations, and the core inflation rate has also fallen from 6.5% to 6.3%. With the exception of food, rental housing prices and service prices that have largely stabilized, other major sub-items have begun to peak and fall.
Oil and gas prices as a whole continue to fall, and from the perspective of futures trading, energy and food prices will continue their downward trend in 2023, which will help the gradual return of inflation in the UK.
Although the 2% inflation target set by the Bank of England will not be met in the short term, the market expects the return of the UK CPI to accelerate significantly from mid-2023.
From the perspective of economic operation, with the continuous advancement of interest rate hikes, its impact on economic activity has begun to appear, and the UK purchasing managers' index (PMI) has fallen below the withering line since August 2022.
In the labour market, although the UK job market has remained strong, remaining low at around 3.7% since the second quarter of 2022, the weakening demand for labor and the gradual increase in the labor force participation rate have led the market to expect the UK unemployment rate to start to rise from 2023.
UK monetary policy, fiscal policy woes, and the outlook for a trade deficit will further limit the pound. From the perspective of the monetary policy situation, the decline in inflation and signs of contraction in economic activity will put pressure on the current interest rate hike policy of the Bank of England, which may start the monetary policy shift earlier than the Federal Reserve and the European Central Bank.
From the perspective of fiscal policy, in response to the impact of the new crown epidemic, the UK Treasury has increased government purchases significantly since 2020, and the monthly fiscal expenditure has increased from 62.2 billion pounds in early 2020 to 81.9 billion pounds, the fiscal deficit has expanded rapidly, and the issuance of government bonds has increased.
Driven by the Bank of England's interest rate hike cycle, UK gilt yields rose, interest rate differentials between the UK and major European countries widened, and the pound strengthened against the euro, a trend that only reversed after the outbreak of the UK fiscal crisis.
With the UK likely to exit monetary tightening sooner, spreads are likely to continue to narrow. The current UK fiscal policy is in a dilemma.
In order to balance the fiscal deficit, a tightening fiscal policy of issuing more government bonds, cutting spending and increasing taxes will have to be adopted, but this will lead to a situation of both monetary and fiscal policy tightening, which will further increase the pressure on the British economy in the medium and long term.
From the perspective of trade deficit prospects, since the outbreak of the epidemic, the UK's trade deficit has been expanding, and the problem of "twin deficit" has intensified, and the UK has to choose the policy mix and the timetable for the implementation of major policies more carefully.
Policy uncertainty will make UK assets less attractive and trigger capital outflows.
It is still necessary to pay attention to the impact of changes in the domestic political situation and external risk factors on the pound. In his speech, the new British Prime Minister made commitments on the five most difficult issues in the UK, such as high inflation, recession and government debt.
To make these five aspects a priority for the British government, investors need to pay close attention to the implementation of the policies of the new British government, the changes in the domestic political situation in the UK and the adjustment path of economic policies.
Externally, changes in monetary policy in the United States and Europe, expectations of a recession in the United States, the Russia-Ukraine conflict, and international food and energy prices will still have an important impact on the pound.
summary
The pound may fall under market expectations that the British economy will fall into recession, monetary policy will shift earlier and interest rates will fall.
With US interest rates peaking and the rate hike cycle over, the pound may recover somewhat from the weakening of the US dollar index.
