12 January 2023: Productivity well below G7 average


  • Significant slowdown taking place in the housing market
  • Oil gain may restart headline inflation
  • Hawkish ECB comments buoy euro
GBP – Market Commentary

Strikes and Brexit drive slowdown

Data released this week has shown that productivity in the UK economy is the lowest in the entire G7. The wave of strikes that took place throughout the fourth quarter of 2022 and are ongoing will do nothing to improve that statistic.

One of the most important sectors of the private sector of the economy is housing. House building as well as sales of existing property makes up around 7% of GDP. The sector is also an accurate barometer of the health of the economy.

Over the past ten years or so, existing house prices have seen an unprecedented period of steady growth as inflation has remained low along with interest rates. Mortgage providers were able to offer very generous deals, and the vast majority of home loans were of fixed terms for extended periods.

Suddenly, following Brexit and the Pandemic, the picture has changed. Virtually an entire generation has had to come to terms with turmoil in the market. As their fixed rate deals expire, suddenly the Building Societies and other lenders have withdrawn the majority of the products they were offering, leaving them borrowers high and dry having to pay significantly higher floating higher rates.

This has had the effect of deterring existing borrowers from deterred from moving, while first time buyers have suddenly seen lenders demanding larger deposits and other less favourable terms.

In the new homes sector, builders are facing a Catch 22 situation. While the market was steady they were able to create land banks which allowed them to both have a steady flow of stock to bring to market and also provide security for current bank borrowings.

As rates have risen, the cost of financing those holdings has increased while sales of recently built properties have slowed down, and they are expected to discount their prices. With fewer houses now being built, there has been a knock-effect on employment in the industry as well as a significant fall in the volume of materials purchased.

The incentives that were offered by now Prime Minister Rishi Sunak when he was chancellor now look like the final act of an era for the housing market, and it will be well after the next election before the sector shows any improvement.

Almost seventy percent of midsized UK firms are actively preparing for a recession over the first half of 2023, while an even higher percentage don’t expect to increase their headcount this year.

The figures for the employment market are not yet reflecting this view and while there is no data for expected lay-offs yet, unemployment is sure to begin to rise over the next two quarters.

Yesterday, Sterling remained in the narrow range it has maintained since trading restarted after the New Year holiday. It finished marginally lower at 1.2146 having earlier fallen to 1.2100.

USD – Market Commentary

Fed concerned inflation is dormant, not defeated

While several economists and analysts remain critical of the Federal Reserve for continuing to raise short-term interest rates, despite inflation beginning to fall and the economy beginning to falter, the Central Bank, chastened by its failure to begin to hike rates sooner, will continue to hike until it can be confident that there will be no turnaround.

Although headline inflation is just that, a piece of data that includes volatile items like energy, fuel and foodstuffs. And has begun to fall over recent months, core inflation remains high and isn’t falling fast enough to allow the FOMC to relax.

The data for December will be released later today and headline prices are expected to have risen by 6.5% last month, compared with a rise of 7.1% in November. The main cause of this will have been the price of oil, which fell below $80 per barrel.

Core inflation is expected to have also fallen, but by a lesser degree. Having reached 6%, the core is expected to have fallen further to 5.7%. Since the larger banks and investment firms use the same tools and the Bureau of Statistics to monitor inflation, these estimates can be considered fairly accurate.

Looking forward, the oil price has risen this month on Inventory building supply issues as well as a surprise in global economic confidence.

The Fed will still be driven by the pace a t which core inflation is falling, and a fifty basis hike is still on the table for the February 1st meeting.

The dollar index is in the process of building a base at the lower level it has reached this week. It was virtually unchanged yesterday at 103.24 having opened at 103.27.

EUR – Market Commentary

Euro consolidating its gains as ECB turns more hawkish

The euro is benefitting from the more hawkish comments being made by ECB officials recently.

That having been said, despite a statement from Pablo Hernandez de Cos the Governor of the Bank of Spain, commenting that interest rates will have to continue to rise significantly over the coming months, his Portuguese counterpart, Marion Centeno spoke of his view that the Central Bank is approaching the end of its policy of raising interest rates.

While neither Central Banker gave any solid reason for their view, the conflict should make for an interesting meeting on 2nd February.

It is worth noting that Spain is now predicting rate hikes. It may be that de Cos is bringing a degree of realism to proceedings. While further rate hikes may not be felt to be in the best interests of Spain, he is being a good European in accepting what is needed for the entire Union.

On the other hand, Centeno is patently talking his book, by attempting to influence proceedings. His argument for the end of rate hikes is that while inflation will rise through January and February, it will begin to fall in March.

Furthermore, his comments on wage growth make very little sense. He sees wages continuing to rise as labour shortages persist and inflation is unlikely to return to the ECB;s 2% target for three years.

Goldman Sachs, the preeminent investment bank, is no longer predicting a recession for the entire Eurozone. While there is little doubt that certain economies within the Union will experience economic contraction this year and into next overall, the growth rate for the entire region in 2023 is projected at 0.6%.

This will provide some solace to Christine Lagarde as she prepares to justify the half percent increase in short term rates that is certain to be agreed at the next Governing Council meeting.

The euro continues to be viewed positively by the market, despite a lack of activity so far this week. Yesterday, it rose to a high of 1.0776 and closed at 1.0753. It is moving towards the resistance at 1.0780, where it may struggle in the short term. That is the high from May 31st last year and saw the euro begin a fall to its late October low.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.