UK Strikes Effect on Markets

With the UK already facing a recession, prolonged industrial action and the uncertainty it causes could make the job of the BOE and government even harder.

It's all too predictable

As prices rose through the year, it's natural that employees would be unhappy to see their purchasing power eroded. The expected result is to demand higher wages. This is a long-established issue in economics, which central banks fear: the wage-price spiral. If there is a tight labour market, employees are in a position to negotiate salary raises which accelerates the inflation problem. 

On the other hand, simply expecting employees, particularly those within unions specifically supposed to negotiate higher pay, to live with less real income because demanding higher wages would be inadequate for the economy isn't reasonable. The spate of strikes across the UK, which has been growing in intensity over the last several months, was entirely predictable. With inflation still in double digits, the wage pressure isn't likely to be alleviated soon. And that could feed over into inflation as some employers agree to above-inflation pay raises to keep workers on the job, such as BT agreeing to up to a 16% wage raise.

Where things go from here

The other factor of strikes is that they disrupt production. Of course, what's critical to people is if healthcare services are curtailed because of a strike by nurses. That gets headlines, but what will likely impact markets more is the uncertainty of supply generated by the threat of workers walking off. Some companies manage to keep up production, others have to shut their doors, and some work between the two extremes. 

This supply chain disruption also feeds into higher costs, which translates into higher inflation. It also implies less tax revenue to support government spending, increasing the threat of austerity in a country with an exploding debt-to-GDP ratio. The primary recourse to head off a recession is to loosen monetary policy and for the government to spend more, but with the UK's high inflation and debt, that is an increasingly unlikely possibility. Strikes worsen this situation by pushing inflation and reducing production, which is necessary for economic growth and to plug the hole in the government's finances. 

The BOE will likely come under increased pressure to get inflation down, even at the risk of a recession. The latest vote split suggests there is still a substantial majority in favour of this option.

Pound approaches critical junction

Cable approaches a major trendline keeping the uptrend intact. If the support around $1.21 is lost, it might open the door to $1.1645 (S2) unless the pair experiences a bounce at $1.19 (S1). An earlier respite might offer bears an opportunity to short the right shoulder of a potential H&S estimated to complete around $1.235 (R1). Although unlikely, increased momentum might expose the peak at $1.2447 (R2) for a double-top formation.

Source: Spreadex Trading Platform

Key takeaways

The UK is facing a recession, and strikes for higher wages could make the situation worse by disrupting production and increasing costs, leading to higher inflation and less revenue from taxes. The BOE may be under pressure to reduce inflation via policy loosening, even at the risk of a recession, due to the country's high inflation and debt.