“The party conference season begins this week, but the phoney war between the Con-Dem Government and the Unions began last week at the TUC conference. One is reminded of Life on Mars as the unions promise a return to the seventies’ glory days of industrial strife and another winter of discontent. The campaign season should be shorter than usual as the consultation periods are unlikely to begin until after details of the spending review are laid bare on October 20th, and there is an administrative delay of six weeks while the inevitable strike votes are counted.
“The TUC leadership will be anxious not to cancel Christmas with public sector strikes, this suggests January is the most likely timing for the bulk of the action. Strikes are an important concern for foreign investors – nobody likes to see revolting natives. But of greater concern is the impact of fiscal austerity on nominal activity.
“The sharp deterioration in the economic data over the past six weeks highlights the rapid slowdown in activity that is likely to culminate in a contraction in real GDP during the first quarter. The role of the central bank is to look forward over the next six to twenty four months. On this basis we believe that the Bank should act as soon as possible.
“Remarkably there is little market speculation of further quantitative easing because of above target inflation. Yet the Governor conspicuously failed to mention inflation in his speech last week to the TUC Conference. There is little that the central bank can do to prevent the inflationary consequences of higher food prices and indirect taxes – both represent a tax on real disposable incomes. These disposable incomes are already contracting in real terms and this squeeze should intensify over the next eighteen months.
“However, inflation is clearly an issue for the central bank in terms of its credibility and inflation expectations. This could force the central bank to delay the re-ignition of quantitative easing until next February. The Fed could help accelerate this monetary assistance if agrees its own version of QE2 before the end of the year.
“More importantly, we believe that UK QE2 will amount to at least £400bn. £185bn of this total will cover the ending of the Special Liquidity Facility and withdrawal of treasury bills from next April. This additional quantitative easing will be bullish for the forward gilt curve and bearish for Sterling.”
These are the views of the author and do not necessarily reflect those of Ignis Asset Management.