The British economy is under heavy pressure this winter, but the central bank gives confidence to the pound bulls

On Tuesday (October 5), the pound against the U.S. dollar rose within three consecutive trading days and fluctuated within a narrow range within the day, stabilizing above the 1.36 level. Britain is facing a very challenging winter because many factors converge. Labor shortages, rising heating bills, and running out of merchandise in stores are all realities facing the British. Entering the winter, the situation may get worse, and the Bank of England (BOE) may have to solve the inflation problem. This series of headwinds once hit the pound, but more and more analysts believe that the market's pessimism for the pound will improve under the prospect that the central bank is expected to take the lead in raising interest rates.

The labor market is facing contradictions and the current situation in the UK is in a dilemma

Britain’s 25-year low-cost labor import model has been subverted by Brexit and the new crown epidemic. In the face of worker shortages, rising wage requirements and rising prices, people worry that the famous British "winter of dissatisfaction" in the 1970s will be severe. now.

After leaving the European Union, Britain immediately fell into the impact of the epidemic, and now it is trying to quit its dependence on cheap imported labor. British Prime Minister Johnson’s Brexit experiment is unique among major economies, and among the series of problems facing the UK, labor shortages may be the most pressing. Many British companies have been relying on cheaper foreign labor. Labor shortages are impacting all aspects of the food supply chain. There is a shortage of people picking/processing food, packaging food, and then delivering food.


(The European Union and the new crown epidemic push European migrants to leave the UK)

The aftermath of Brexit has not settled, causing labor shortages and rising wages

Johnson described his Brexit bet as an "adjustment," although opponents said he was disguising the labor shortage as a golden opportunity for workers to raise wages. However, when the epidemic has brought an economic shock that has not been seen in 300 years and triggered a 10% economic contraction in the UK, the policy of restricting immigration is expected to once again have an impact on the future generations of the UK.

After Brexit, the government no longer prioritizes EU citizens. Brexit has prompted many Eastern European workers-including some 25,000 truck drivers-to leave the UK. At the same time, about 40,000 truck license testing has been suspended due to the epidemic. There is a shortage of about 100,000 truck drivers in the UK, which has led to long queues at gas stations, people are worried that food will enter supermarkets, and the lack of butchers and warehouse workers has also raised concerns.

The long-term impact of changes in labor import patterns on economic growth, Johnson’s political fate, and the intermittent relationship between the UK and the EU is unclear. When asked about labor shortages, 57-year-old Johnson said: "I will not go back to the low wages and low-skilled model caused by uncontrolled immigration." Johnson bluntly told business leaders in a closed-door meeting to improve worker's salary.

Johnson said: "Our country has been maintaining a relatively low wage growth rate for a long time. Basic wages and full productivity have stagnated. This is because, for a long time, we have not been able to invest in talent development, nor have we been able to invest. Equipment optimization has made it difficult for wages to rise.” However, he did not explain how to solve the problems of stagnant wages and low productivity through a hybrid approach of lowering immigration and raising wages. People still worry that this policy will increase inflation and erode. Real wages

British economic growth is lagging, but hope still exists, and the Bank of England is expected to raise interest rates

The UK’s cumulative GDP change from the fourth quarter of 2019 to the second quarter of 2021 is the slowest among the G7 nations. The Brexit policy of the United Kingdom is believed to have contributed to the current economic isolation of the United Kingdom.


(British economic recovery is weaker than other G7 countries)

Last month, the Bank of England stated that “mainly due to the development of energy and commodity prices, the CPI inflation rate will rise to 4% later this year, and the possibility of raising interest rates from historical lows seems to have strengthened. The bank quoted The evidence showed that “recruitment difficulties have become more common and severe”, which the bank attributed to “a combination of multiple factors, including demand recovering faster than expected and reduced availability of EU workers”.

However, UBS Group strategist Gaétan Peroux said: "The negative news about various shortages in the UK has hit the pound, but we expect investor sentiment towards the pound to recover, because the Bank of England will obviously tighten monetary policy next year."

It is worth noting that the UK's gross domestic product (GDP) data released on Thursday helped show that the UK's second-quarter economic growth exceeded previous expectations. GDP grew by 5.5% in the second quarter, higher than the 4.8% initially expected. This means that the current GDP level of the UK is 3.3% lower than before the fourth quarter of 2019, and was previously estimated to be 4.4% lower.

These developments mean that the Bank of England may raise interest rates in early 2022, which is earlier than other major central banks such as the Federal Reserve and the European Central Bank. Analysts believe that this interest rate advantage is a basic source of support for the pound.

Institutions raise the growth rate of the UK during the year, the pound may be further boosted

Barclays (Barclays) foreign exchange strategist Marek Raczko (Marek Raczko) said: "We also continue to believe that the attractive investment properties of the United Kingdom and the long-term undervaluation of the pound will become a strong anchoring factor for the pound."

Barclays (Barclays) economists raised the growth rate for 2021 by 0.9 percentage points after the release of the GDP data, and now expects it to be 7.3%. Under their new image, the UK economy will return to its pre-epidemic level in the first quarter of 2022, one quarter ahead of previous forecasts.

Raczko said: "We expect the market to focus on long-term fundamentals as a guide to the trend of the pound. The weakness of the pound last week is inconsistent with the sharp increase in the British government bond yield (three interest rate hikes next year). The long-term undervalued pound will become the pound. A strong pillar of

It is unclear how price increases will affect the British economy. The British economy is consumer-driven and increasingly dependent on the supply chain, which has tentacles throughout Europe and other regions.

This is a story worth paying attention to. The effects of Brexit and the new crown epidemic are intertwined and have brought a double blow to the UK. These shortages should not be so severe, but please be aware of the buildup of inflationary pressures, which will force the UK to act quickly on interest rates. This may mean that there will be some unusual fluctuations in the pound in the coming weeks. On Tuesday (October 5), the pound against the U.S. dollar rose within three consecutive trading days and fluctuated within a narrow range within the day, stabilizing above the 1.36 level.


(Pound against the U.S. dollar daily chart)

GMT+8 At 15:43 on October 5th, the British pound was quoted at 1.3607 against the U.S. dollar