Wednesday, July 8, 2020

What else can the British government do to help stimulate the British economy?

Tags
  • Pound
  • UK Unemployment Rate

07082020a_ta

Analysts’ Pick: What else can the British government do to help stimulate the British economy?

  • Today’s summer statement from Chancellor Sunak is likely to be focused on saving jobs and training the British workforce for new jobs
  • Consumer spending is likely to be another focus, although a general sales tax cut looks unlikely to provide efficient benefits to the economy
  • A support package for the arts sector suggests that there may be more upcoming industry specific measures for businesses that have been more greatly affected by the Covid-19 pandemic
  • Brexit remains a key issue with little progress on the trade negotiations front. Either way, the impact on the UK’s economy post-Brexit is likely to be greater-than-expected following the Covid-19 pandemic

British Chancellor of the Exchequer Rishi Sunak is set to make his summer statement to parliament later today about 1pm London time or 8pm Hong Kong/Singapore time (GMT +8) after British Prime Minister Boris Johnson's Prime Minister's Question Time at midday on Wednesday. The most anticipated part of Sunak's plan will likely be the portion on the British government's next move to help the labour market in the UK. The current furlough scheme will end in October, with benefits of the scheme starting to taper off in August. Flexibility has also been added to the scheme since July 1st, which allows businesses to decide the hours and shift patterns of employees in light of the Covid-19 pandemic lockdowns in the earlier part of the year, with the government continuing to pay 80% of salaries for the hours that the employees do not work.

Unemployment rate figures are lagging behind real data due to its methodology (three-month average), but with the government furlough scheme coming to an end, expect employment data to fare much worse in the coming months

07082020b_ta

The unemployment rate in the UK has mostly benefitted from the government's furlough scheme which is estimated by the government to have helped prevent 9.3 million more layoffs with more than 25.5 billion pounds in claims to support wages as of 28th June. The issue however, is that the employment protection is likely to only be temporary, with Sunak pushing back calls for an extension to the scheme likely due to concern that an extension will increase the pressure on fiscal budget as well as cause moral hazard by disincentivising workers to upskill themselves to search for new jobs.

Polls by Opinium for Bright Blue suggests that there will be more layoffs in the British economy as the government’s furlough scheme tapers off in the coming months

07082020c_ta

Sunak resisting calls for an extension to the furlough scheme coupled with 800-million-pound worth of funds being poured into job centres in the UK that was announced over the weekend suggests that the British government will likely focus on creating jobs while encouraging employability to help individuals instead of companies to improve labour market conditions in the UK. This would also be in line with a post-Brexit environment since post-Brexit trade with the EU is likely to increase the need for additional workers at the border customs, as well as trained workers for companies in the UK that conducts trade with EU member countries. It would signal that today's summer statement presentation will likely contain more policies to help stimulate the labour market directly or indirectly, in addition to a number of proposals already announced since the weekend.

Other than employment, the government will likely focus on consumer spending as well, since consumers account for about two-thirds of the UK's demand. There is a possibility that the Sunak will consider VAT tax cuts or government pay outs to help stimulate consumer spending domestically. Both may however be ineffective in driving consumer spending in the short-term if citizens remain cautious on an economic outlook however. The former may also benefit businesses more as opposed to consumers since cost savings may not be passed down to customers. In addition, running VAT tax cuts may also not drive consumer demand any higher and only incur costs for the government since easing lockdown restrictions will likely already result in a temporary surge in consumer spending. Sunak may as a result choose to delay the decision for VAT cuts to later in the year during his autumn statement instead, to give the Treasury department additional time with data to better evaluate the benefits for a sales tax cut.

Savings rate in the UK should be expected to spike up even more in Q2 as lockdowns greatly reduced the outlets for consumers to spend during the period

07082020d_ta

Industry-specific policies may also be a focus for today's statement, hinted by the 1.6-billion-pound package to help support the arts sector over the weekend. The hospitality and tourism sector, along with the Food & Beverage sector (in particular restaurants) may also find some support from the British government tomorrow, possibly in the form of grants and loans, similar to that in the art sector support package.

The impact of the lockdown has varied across sectors, with some of the most affected industries being air travel, transportations and restaurant businesses

07082020e_ta

Brexit negotiations will likely be another driver for sterling as we approach the second half of the year. Chief negotiators from the EU and the UK has resumed talks, but with both the British and European economy facing downward pressure resulting from the economic impact of the Covid-19 pandemic, Brexit is likely to have a greater impact on both economies than earlier anticipated. Trade negotiations between the two blocs have made little progress on issues ranging from fishing rights and the European Court of Justice's influence in the UK, signalling that the likelihood for a free-trade agreement between the two blocs may be declining. Johnson has also made clear that the UK is equally ready to leave with or without a deal, after speaking to German Chancellor Angela Merkel on Tuesday. While incentives for both parties should still drive to some sort of trade agreement by the end of the year, the initial negative economic impact resulting from the deal is likely to be large. With the Covid-19 pandemic taking precedence in severity over a post-Brexit trade deal, there may not be enough time or resources for businesses to prepare for a post-Brexit environment (additional resources and preparations are likely needed to ensure smoother trade between the UK and the EU; businesses will need to train workers as well, to meet EU standards as well as adopt the appropriate procedures to engage in trade with countries in the EU). As a result, while sterling may benefit from some likely progress in trade negotiations between the two over the next half of the year, the longer-term prospects for the UK looks likely to face large amounts of downward pressure moving forward, before the British economy even starts to benefit from leaving the EU bloc.

Hence, with more fiscal stimulus policies likely to be proposed by Sunak today, sterling looks likely to benefit in the short-term, as in the medium-term as Brexit trade negotiations continue. GBP/USD may as a result be able to rise up towards 1.2590's level later today after the summer statement from Sunak. Over the medium-term, the currency pair may be able to trend higher towards 1.2668's level as the global economy continues to recover, although it currently looks unlikely to break that level since increasing risk aversion due to a second wave of Covid-19 infections in the US is likely to drive demand for the greenback due to its safe haven properties. Over the long-term, we expect the British economy to continue to face downward pressure and consequently sterling, resulting from the after-effects of high levels of unemployment in the country thanks to the Covid-19 pandemic and the economic impact from exiting the EU bloc.

Technical Analysis:

GBP/USD

 MACD suggests that cable has shifted in to a bullish bias. However, overall the currency pair is still under bears’ possession, trading below the 200-day moving average. Potential additional fiscal stimulus measures from the British government may help bulls to break 1.2590’s level but it may be difficult for them to break the 23.6% Fibonacci retracement level at 1.2633. Fundamentally, this may bee so as a second wave of Covid-19 infections in the US may push up demand for the greenback. Progress on the Brexit trade negotiations is likely to mitigate this, but that may be over the medium-term instead.

Support: 1.2527 / 1.2458 / 1.2347

Resistance:  1.2590 / 1.2668 / 1.2788

GBP/USD Chart (H4)

07082020f_ta