1 February 2023: Most workers on strike in a Decade

Britain will grind to a halt today as industrial action by teachers, train crews, civil servants, nurses, and ambulance crews down tools to protest in favour of higher pay rises.

The Government has so far stood its ground, saying that the offers made are in line with the recommendations of independent reviews and any additional money would simply begin a vicious circle which would feed inflation.

Real wages have been falling, which means that the cost of living crisis is being prolonged. There have been a number of support schemes provided by the Government, but pay itself has fallen so far behind that workers are looking for new jobs because it is simply no longer viable to do jobs which in the past have been considered a vocation.

There is a great deal of public support for the nurses and ambulance crews, especially given the awful toll taken by Coronavirus. However, teachers are facing a difficult time, with pupils who have already fallen behind following the Pandemic barely able to be away from school any longer.

The Government has asked that schools remain open today if at all possible. Special arrangements are being made to ensure that the children of essential workers are catered for, but if action continues, the disruption caused to exam timetables could contribute further to claims of a lost generation.

The Bank of England will begin its meeting today, at which it will consider a tenth consecutive rise in short-term interest rates. With the IMF’s words ringing in members’ ears that the UK will be the poorest performing major economy in 2023, a hike of twenty-five basis points is the likely conclusion.

It is curious that Andrew Bailey chose last week to give a more upbeat review of growth in activity when the view that the IMF was getting was for a recession which will see the economy contract by close to one per cent.

Jeremy Hunt was also confident that the economy can astound the latest prediction as it has in the past as recently as last year.

The pound has lost ground over the past three sessions as traders position themselves for this week’s Central Bank meetings. Yesterday, it fell to a low of 1.2284, but recovered to close at 1.2327.

It seems that with every data release that takes place, the economy either slips a little closer to recession or commentators are prompted to believe that the country will escape a contraction this year.

There is even a school of thought that the accepted method of deciding whether recession is taking place; two consecutive quarters of negative growth, is flawed and a new method needs to be created.

While it may not be perfect, several things have to be in line in order for an economy to contract, and if there is no recovery following a single contraction, that promotes a second, the conclusion should be that a recession is taking place.

Clearly, times have changed over the last economic cycle, during which interest rates and inflation hit record lows and economists could be forgiven for considering that inflation had indeed been defeated. Supply chains were working efficiently, supply and demand were roughly in line with each other, and there were no major conflicts.

Then came the Coronavirus Pandemic which is still, apparently, raging in China followed by the invasion of Ukraine by Russia.

These two events have thrown the global economy into chaos and with the U.S. being the world’s largest consumer it was only to be expected that it would be the most affected.

The Federal Reserve chose to sit on its hands, cherishing its independence, even as it became clear it had badly misjudged the situation. It has been paying for that inaction since, and because interest rates had fallen to such a low level it has taken longer than was necessary to bring rates to a level where demand is dampened sufficiently to drive inflation lower.

The Fed chose to aggressively raise interest rates in late summer and autumn, and inflation has fallen over the past quarter or so.

The question facing the FOMC today is, has the time come to hike interest rates by smaller increments than has been seen recently. Despite some scepticism from its Chairman, the committee is expected to vote for a twenty-five basis point increase today, bringing the upper level of the range for Fed Funds to five percent.

The dollar index has found some support around the 101.60 level, and may test that level again if the comments that follow the meeting are considered overtly dovish. Yesterday, the index rose initially to a high of 102.61, but as traders prepared for today’s FOMC meeting, it fell back to close lower on the day at 102.09.

Today, battle will recommence between the hawks and the doves on the Governing Council of the ECB, to decide the path of short term interest rates. It is hard to believe that it has come down to a battle of wills that will most likely conclude in a compromise decision.

On one side, the hawks, driven by an almost pathological concern about the effect on their own economies of inflation, are prepared to inflict a seventy-five basis point increase on a number of countries who, while also suffering higher prices, also have significantly weaker economies.

The doves will demand that if rates are to rise let it be the least possible amount, twenty-five basis points, for the reasons already mentioned. The hawks will reason that a twenty-five point hike will see high inflation continue, as it will take that much longer for rates to reach the point where they are either neutral or restrictive.

To a large extent, this is more than a matter of ideology, as it threatens the very roots of monetary union, since the hawks and doves are permitted to have very different fiscal policies which on the one hand are contributing to inflation while on the other they are designed not to.

This is the dilemma facing Christine Lagarde as she prepares to chair yet another stormy meeting at which there can be no agreement, even if both sides are prepared to vote for a decision with which neither side agrees.

There is no doubt that the entire Eurozone economy is gradually turning away from thoughts of an ugly recession partially caused by high(er) interest rates, but inflation is still too high.

The euro has been supported in large part by tighter monetary policy since it began to climb away from parity with the dollar last November. While it is tentatively standing on its own feet currently, this is not the time for the ECB to return to its dovish ways of the recent past.

The euro climbed to a high of 1.0875 yesterday, but needs to conclusively break the 1.09 level in order to mount a serious challenge to the 1.10 level. It eventually closed at 1.0872.

Have a great day!