– GBP / USD around 1.90?
– GBP / EUR around 1.40?
– Forget GDP, CPI data
– Job postings tell the real story
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The pound has great potential for appreciation according to research by Toscafund Asset Management LLP, the multi-asset investment management firm, which says Adzuna’s job postings tell an important story.
The pound should benefit as the Bank of England is raising interest rates at a faster rate than the market currently thinks, thanks to a strong economy, as evidenced by the increase in job vacancies.
“Readers could be forgiven for being extremely concerned about the UK’s economic outlook, fearing that its growth will fail and inflation will spike,” said Dr Savvas Savouri, chief economist at Toscafund Asset Management.
But, Savouri, a renowned scholar and economist who has worked at several institutions in the city, says:
“Drawing on all aspects of my education and experience convinces me that the UK’s economic future is as fair as I have ever seen it. “
In a new discussion paper regarding the UK economy, Savouri says perhaps the most important metric to watch is the Adzuna job vacancies dataset released by the ONS, a relatively new component of the mixture of official economic data of the country.
As of September 10, the Adzuna dataset showed that the total volume of online job vacancies was at 128% of its average level in February 2020.
Savouri says the timeliness and breadth of Adzuna data is proving to be a very useful tool in understanding the capacity dynamics of the modern UK economy.
For Savouri, indicators such as GDP and CPI inflation are of the “old school” type that have been useful to planners during the more industrialized trajectory of the economy.
But the modern UK economy is dominated by services and a highly mobile workplace with fluid working boundaries, making measuring output incredibly difficult.
The problem facing economists like the Bank of England is that the Covid crisis and Brexit – which struck simultaneously – have once again changed the shape of the economy, creating a risk that the tools of economic measurement currently privileged become even more obsolete.
The Adzuna job vacancy series was one of the new real-time data measurement tools co-opted by the ONS to assess the health of the labor market during the crisis and during the recovery that followed.
Above: Adzuna vacancy over salary and CPI growth, with forecast, image courtesy of Toscafund.
What the real-time jobs are telling the Toscafund research team is that the combination of the coronavirus crisis and Brexit has structurally altered the UK economy and labor market as wages will increase more aggressively in response to labor shortages than in the past.
Savouri expects the UK economy to see a strong rebound in jobs and wages in the coming months, based on the data he sees.
The Bank of England is expected to respond to the improving economy by raising interest rates at a faster pace than the markets are currently expecting.
“As the MPC sees the UK economy quickly pulling back sharply, it will exceed expectations by removing the base rate from the emergency level,” said Savouri.
Index of Services vs Adzuna vacancy, with forecasts. Image courtesy of Toscafund.
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Savouri says members of the Bank’s monetary policy committee will find it with the UK outside the EU’s Single Labor Market (SLM) and by operating a “truly international work visa system, its Phillips curve will work again, as will the unemployment rate as a forward-looking guide to inflationary pressures. “
The Phillips curve explains how wages rise as unemployment declines, which is why central banks have tended to view falling unemployment as a precursor to higher inflation levels in the future.
But Savouri says the forward-looking monetary policy stance of former Bank of England governor Mark Carney was ultimately undermined by the inability to determine where the inflection point between falling unemployment actually resided. and rising wages.
Indeed, at Carney’s start at Threadneedle Street, policy guidance suggested that interest rates could start rising when unemployment started to drop below 7.0%, as that would shift the dial on wages.
However, even when wages hit 5.0%, wages and inflation proved stubbornly unresponsive.
Savouri says Carney and his team failed to recognize that the UK’s presence in the European Single Job Market meant that the supply of labor would inevitably increase in response to any pay rise:
“Carney should have realized that in 2013 the UK job market was a very different place than it was in Phillips’ day and, in fact, when I started my career in economics in the middle from the 80s. “
“What was once a largely univariate relationship linking the unemployment rate in the UK to wage inflation in the UK has become much more multivariate,” he adds.
Fast forward to 2021 and the UK is out of the single market and operating under a new points-based immigration system that Savouri says will be fairer for foreign workers from outside the EU.
He also expects a large number of EU nationals eligible to work in the UK to return.
Most importantly, “those who arrive will be adapted to bring in the talent for which the UK economy has the highest excess demand.”
“I have no doubt that with a level playing field that is now perfectly level, the number of people arriving in the UK for work will not decrease, but will increase. A higher level compared to those coming from within and from outside the EU, ”he says.
Above: Annual UK work arrivals, with forecasts. Image courtesy of Toscafund.
Savouri says the UK economy’s ability to generate jobs will generate more sustained inflation than has been seen in recent years.
“We can NOW take the UK unemployment rate as a reliable indicator of the base rate,” said Savouri.
“Adzuna’s data really promises to be a scout for monetary policy makers and those keen to prepare their actions,” he adds.
Toscafund anticipates that a preemptive rate hike based on Adzuna’s forward guidance, and confirmed by other reliable vacancy signals, would actually lower the peak at which the UK base rate is expected to reach in the next bull cycle.
They project minimum Bank of England base rates of 1.1% and 1.6% by the end of 2023 and 2025, respectively.
In addition, they project a CPI of around 2.1% for 2023 and around 1.75% for 2025.
“I have no hesitation in asserting that the UK base rate will begin its journey out of emergency territory much sooner than the consensus claims,” he said.
And what does this mean for the pound?
The rule of thumb in currency markets is that a central bank that raises interest rates earlier and more aggressively than its peers will see the currency it issues appreciate.
Therefore, if Savouri is right, the exchange rates for the British pound are higher.
Indeed, Toscafund expects the pound to appreciate significantly over the coming months and years.
“As the UK base rate changes significantly, albeit moderately, sooner than expected, we should expect the pound to finally start to regain the ground it lost with the ‘shock’ referendum result of June 2016, ”said Savouri.
“The pound sterling cannot fail to rise,” he adds.
Below: Pound-to-dollar forecast:
Below: Pound-euro forecasts: