© Ross Walker
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To my mind, there are several factors weighing on the competitiveness of UK goods. First of all, and probably most important, is the general deterioration, or ongoing fragility, in overseas demand. We can see a decrease in global trade flows, global GDP is moderating, and growth in the EU, our main export market, still looks rather vulnerable. Thus, first and foremost, the problems are caused by weak demand backdrop.
Over time, we have also seen steady appreciation in the Sterling on a trade-weighted basis, partly reflecting the Bank of England's relatively hawkish stance, certainly versus the European Central Bank or the Bank of Japan; and hence, that upward pressure on the currency obviously dents export competitiveness.
In general, I think we will see a continuing subdued pricing environment. We have disinflationary trends continuing in commodity markets. Moreover, we can see that there is still significant pipeline disinflation in producer price data. Therefore, I think the era of low inflation has still somewhere to run and, to my mind, those pressures will remain intense in the traded goods space.
According to the Office for National Statistics, the UK's inflation rate as measured by the CPI remained at -0.1% in October. Do you believe that lower inflation, which will in turn bolster consumer spending power, will be able to spur the growth in the nearest future and if yes, then will the boost be sustained in a longer-term?
We believe that inflation in the UK has probably reached its low point. We do not think that it will rise particularly quickly; however, it might be a blip higher around the turn of the year in early 2016, as previous energy price cuts drop out the year-over-year CPI measure. Beyond that, the rise in inflation will be relatively modest, or even quite slow; nevertheless, it will be rising. Thus, the boost, which has been particularly marked in 2015 through lower inflation boosting purchasing power, is going to diminish.
In addition to that, we have a sizeable fiscal hit coming to households. The City is far too focused on pre-tax income and not focused enough on the squeeze that is coming to disposable income. Therefore, I believe that in the year ahead consumers will find life a little bit tougher than they have in 2015.
Forecasts for the first change in interest rates since 2009 have been pushed further into the future, following the latest reports from the Bank of England. Many economists believe that rates will not rise until the second quarter of next year and perhaps later. Do you share this view? When do you expect a rate hike by the BoE?
At the current moment, our forecast for the first rate rise is for August 2016. I think the risks are that it comes later than that. In my opinion, most of the risks for the economy are to the downside. Of course, if the US Federal Reserve raises rates in December, market pricing is likely to shift at least for a short period towards pricing in a higher probability of an earlier UK rate rise. However, it seems very unlikely that the BoE will raise rates in February, and the November inflation report was certainly not the policy signal. Moreover, the combination of weaker macroeconomic factors that we have discussed plus the risks of a UK Brexit and the impact that it could have on business confidence and investment are the factors that could yet see the first BoE rate rise being delayed further.
What factors will influence the performance of the Pound this year and what are your forecasts for GBP/USD and EUR/GBP by the end of 2015 and in a longer term?
I believe it is a more complicated issue; thus, the bigger picture is still the Dollar strength story in currency markets. We think the Sterling probably loses a little bit of ground against the Dollar, though there is some possibility that if the UK interest rates rise expectations are brought forward, that could give some temporary support to the Sterling in the short-term. However, we think that in general the Sterling will soften over the next year versus the US Dollar, but strengthen against most other currencies, including the Euro.