31 May 2023: Labour’s economic plan could turn out to be a disaster

The UK economy is facing some major issues in the long term as the Government tries to put in place a strategy that will leverage Brexit while the Bank of England tries to extinguish the threat of inflation.

While it is now generally agreed that the country will now face a recession this year, thoughts are turning to the long-term prospects which may include a leap into the unknown as the people decide it is time for a change of Government.

The last time this happened was in the nineties when Conservative Party “shot itself in the foot” and ushered in the Blair/Brown years.

It may be that the country needs a fresh approach, but the current Labour leadership is hard to understand. Yes, they ” make noises” about the need for change and how they will cut debt, while at the same time investing in the future of the country.

Without being sceptical, whenever Shadow Ministers are asked the how of their policies, they do little more than make hopeful noises, critical of the current situation but fail to add any “meat to the bones”.

The team assembled by Rishi Sunak has the ability to get the economy running in the right direction, but can they persuade voters that they can again be trusted?

Rishi Sunak still repeats the mantra of being a safe pair of hands on the tiller, but can he claim to be anything different to what went before, given the continued “banana skins” that keep appearing?

In truth, anything would be better for the country than what went on over the previous eighteen months. There has been a great deal of self-congratulation and back-slapping since the IMF admitted that it had got it wrong over the country’s prospects for this year. However, what of the year after this one?

Can Sunak withdraw from more day-to-day firefighting and look at putting in a strategy that both members of his Party and the electorate can get behind?

He is failing in the most horrendous way to lower the level of net migration which was one of his major undertakings when he came to power. Labour is unlikely to have the will to do things any differently.

Labour is “cosying up” to Joe Biden’s administration which can be best described as “spendthrift”. The U.S. can afford “to throw money at the problem”, the Uk cannot and never will.

It is going to be a difficult time between now and the next General Election. Unfortunately, the electorate may well be asked to decide between the lesser of two evils.

Yesterday, the Sterling continued its recent run of positive sentiment around further rate hikes. It is now considered unlikely that the MPC will pause the cycle of fate hikes given the rise in core inflation and the smaller-than-predicted fall in the headline number.

The pound rose to a high of 1.2446 and closed at 1.2414.

It has turned into a cliche but this week’s publication of the May employment report may well be the one that confirms that the FOMC now has room to pause its cycle of interest rate increases, even if it does not feel comfortable in “shutting down” the entire process.

It is the nature of the Federal Reserve to err on the side of caution. This is particularly true of its current Chairman who drew severe criticism for his inability to spot the seriousness of the initial rise in inflation.

There are myriad reasons why inflation started to become ingrained in the economy following the pandemic, but Treasury Secretary, Janet Yellen and her boss, President Biden, must take a significant portion of the blame as they continued to send out welfare cheques to citizens without first checking if that policy was needed.

Previous Chairmen of the Federal Reserve have been men of action. Of the most recent holders of the role, Alan Greenspan and Ben Bernanke have shown a willingness to “stand up and be counted”, while Jerome Powell appears to lack the fortitude to do anything but do things by the book.

This has led him to be “caught between two stools”. Rates have been hiked for too long while the aggressive policy of fifty or seventy-five basis points was considered too stringent and likely to push the economy into a recession, while the twenty-five points that have followed have merely prolonged the agony.

It is likely that if you asked ten economists about their view of the economy in six month’s time five would say recession, and five would not.

The U.S. is not used to this kind of indecision. Hopefully, it will end next month.

The FOMC has been waiting for the number of new jobs being created month over month to moderate sufficiently and with that wage increases will also be expected to fall back.

If the rate-setting committee decides to pause when it meets, the dollar will face renewed pressure as the Fed falls behind, certainly the ECB and possibly the Bank of England in a marginal loosening of monetary policy, but it shows leadership and commitment.

The dollar fell back yesterday as the deal on the debt ceiling was handed over to Congress for discussion. It fell to a low of 103.87 and closed at 104.04.

Very little is certain in the current global economic situation, but the likelihood that the ECB will continue to increase short-term interest rates at the end of the current quarter is as safe a bet as can be found.

When the Bundesbank, which is currently presiding over a recession, is among the most hawkish members of the General Council which decides on monetary policy it is clear that very little will change its mind.

Two further hikes are likely to be agreed before Christine Lagarde asks members of the Council to consider a pause.

Overall output in the Eurozone is weak but even the most dovish member sees, or at least has been persuaded that the most dominant feature of the economy is high inflation that is refusing to fall materially despite nine months of rate hikes.

It may very well be that the Chief Economist, Philip Lane, is deluding himself by commenting that he sees very little sign of a wage/price spiral beginning. It is possible that wage increases that are in the pipeline haven’t surfaced yet.

To “put all his eggs in one basket” by hoping that the fall in energy prices will be the panacea that cures the inflation ills of the region may be naive.

The Eurozone is still facing the issue of the war in Ukraine which has seen a significant escalation over the past week with increased shelling of the Ukrainian capital.

The Eurozone retains a propensity to “drag defeat from the jaws of victory”, so even if they are successful in bringing inflation back close to its target, there may well be another issue waiting in the wings to trip up its economic recovery.

The euro snapped a five session losing streak yesterday. It rose to a high of 1.0746 and closed at 1.0743.

Have a great day!