February 13, 2017: The concept of macroeconomics can be complicated enough, without attempting to correlate the real-time relationship that exists between entities such as inflation, interests and the value of the pound. This correlation is particularly difficult to trace at present, thanks primarily to the lingering spectre of Brexit and the impact that is having on every aspect of the British economy.

Let’s start with the value of the pound, however, which has experienced mixed fortunes since the June referendum vote. Although it sunk to a record low in the hours after the result was announced, it rebounded steadily during the third financial quarter. Then it plummeted to a new, 31-year low after a Theresa May-led conference in October, during which she revealed the likelihood of a hard Brexit and her initial intention to trigger Article 50 in March of 2017.

Inflation, the pound and the rising cost of imports

As if this was not enough, the pound experienced a further dip after disappointing UK inflation data, which emerged despite the overall rate declining from 1% to 0.9%. Although this surprised experts who had predicted a slight rise in inflation, the overall rate continues to outstrip the base interest rate being maintained by the Bank of England (BoE). This is beginning to have a huge impact on savings accounts rates and households nationwide, while the Office for National Statistics (ONS) also relayed that factory gate prices and the cost of raw materials also increased at a disproportionate rate throughout October.

As we can see, this is continuing a destructive macroeconomic cycle, as a perpetually weak pound continues to trigger inflation hikes while creating a need to maintain base interest rates.

This trend is likely to continue for the foreseeable future, at least until there is greater clarity concerning the terms of Brexit and the UK’s economic strategy in the meantime. The fact that raw material costs are also rising sharply offers an indication as to how a weak pound is beginning to increase the cost of imports, which will translate into higher consumer inflation over time. According to recent PPI data, the cost of procuring materials jumped by a record margin in October, increasing by 4.6% over a four-week period.

Similarly, price of goods leaving factories has already risen by its highest margin since April 2012 (2.1%), meaning that customers are beginning and will continue to shoulder the burden of a weak pound and soaring, disproportionate inflation levels. This is particularly concerning, as our economy currently remains over-reliant on consumer spending and borrowing, meaning that a sustained period of currency volatility and high inflation could have one of two significant consequences; either consumers will borrow more and create an increased debt burden, or simply stop spending and save their money. Both these options are potentially harmful to the economy, meaning that the threat of a recession will continue to loom as we enter 2017.

Are there reasons for optimism?

At this point, it is important to note that there are reasons for optimism in the UK. Firstly, developed economies and the financial markets have become increasingly robust since the Great Recession, while economists, investors and political leaders have applied determinism to minimise the impact of volatility. This is likely to be the case here, with the Federal Reserve in the US and the UK’s own BoE considering hiking interest rates as a way of negating some of the havoc wreaked by rising inflation (this will be good news for savers in particular). Additionally, although growth slowed according to the recent GDP results, there was some growth to speak of.

The pound itself also received a boost when Donald Trump was announced as the President-elect in the United States, as this triggered a wave of volatility with the global markers and triggered a decline in the value of the dollar. This led to gains for the GBP/USD, although many of these were lost at the beginning of the week. Given that little is known about Trump’s precise economic policies (and the fact that the real estate mogul is known to favour a slightly weakened dollar), the pound may be able to make further gains during the next financial quarter, make sure to keep an eye on currency trading rates.

The last word

Ultimately, much will depend on the BoE and how it intends to restructure and rebalance the macro economy. This will almost certainly mean a rise in interest rates, as this will at least partially minimise the impact of rampant inflation.

It can do little about the value or the volatility of the pound, however, which remains the main trigger of inflation and rising import costs. Resolving this issue sits on the shoulders of the government, who must act decisively when dealing with Brexit and strive to lay out a clear path of growth going forward.

Marcus Turner Jones is an investor based in Buenos Aires

The post UK troubled by inflation and weak pound appeared first on International Finance.

December 5, 2016: The concept of macroeconomics can be complicated enough, without attempting to correlate the real-time relationship that exists between entities such as inflation, interests and the value of the pound. This correlation is particularly difficult to trace at present, thanks primarily to the lingering spectre of Brexit and the impact that is having on every aspect of the British economy.Let’s start with the value of the pound, however, which has experienced mixed fortunes since the June referendum vote. Although it sunk to a record low in the hours after the result was announced, it rebounded steadily during the third financial quarter. Then it plummeted to a new, 31-year low after a Theresa May-led conference in October, during which she revealed the likelihood of a hard Brexit and her initial intention to trigger Article 50 in March of 2017.

Inflation, the pound and the rising cost of imports

As if this was not enough, the pound experienced a further dip last week after disappointing UK inflation data, which emerged despite the overall rate declining from 1% to 0.9%. Although this surprised experts who had predicted a slight rise in inflation, the overall rate continues to outstrip the base interest rate being maintained by the Bank of England (BoE). This is beginning to have a huge impact on savings accounts rates and households nationwide, while the Office for National Statistics (ONS) also relayed that factory gate prices and the cost of raw materials also increased at a disproportionate rate throughout October.

As we can see, this is continuing a destructive macroeconomic cycle, as a perpetually weak pound continues to trigger inflation hikes while creating a need to maintain base interest rates.

This trend is likely to continue for the foreseeable future, at least until there is greater clarity concerning the terms of Brexit and the UK’s economic strategy in the meantime. The fact that raw material costs are also rising sharply offers an indication as to how a weak pound is beginning to increase the cost of imports, which will translate into higher consumer inflation over time. According to recent PPI data, the cost of procuring materials jumped by a record margin in October, increasing by 4.6% over a four-week period.

Similarly, price of goods leaving factories has already risen by its highest margin since April 2012 (2.1%), meaning that customers are beginning and will continue to shoulder the burden of a weak pound and soaring, disproportionate inflation levels. This is particularly concerning, as our economy currently remains over-reliant on consumer spending and borrowing, meaning that a sustained period of currency volatility and high inflation could have one of two significant consequences; either consumers will borrow more and create an increased debt burden, or simply stop spending and save their money. Both these options are potentially harmful to the economy, meaning that the threat of a recession will continue to loom as we enter 2017.

Are there reasons for optimism?

At this point, it is important to note that there are reasons for optimism in the UK. Firstly, developed economies and the financial markets have become increasingly robust since the Great Recession, while economists, investors and political leaders have applied determinism to minimise the impact of volatility. This is likely to be the case here, with the Federal Reserve in the US and the UK’s own BoE considering hiking interest rates as a way of negating some of the havoc wreaked by rising inflation (this will be good news for savers in particular). Additionally, although growth slowed according to the recent GDP results, there was some growth to speak of.

The pound itself also received a boost when Donald Trump was announced as the President-elect in the United States, as this triggered a wave of volatility with the global markers and triggered a decline in the value of the dollar. This led to gains for the GBP/USD, although many of these were lost at the beginning of the week. Given that little is known about Trump’s precise economic policies (and the fact that the real estate mogul is known to favour a slightly weakened dollar), the pound may be able to make further gains during the next financial quarter, make sure to keep an eye on currency trading rates.

The last word

Ultimately, much will depend on the BoE and how it intends to restructure and rebalance the macro economy. This will almost certainly mean a rise in interest rates, as this will at least partially minimise the impact of rampant inflation.

It can do little about the value or the volatility of the pound, however, which remains the main trigger of inflation and rising import costs. Resolving this issue sits on the shoulders of the government, who must act decisively when dealing with Brexit and strive to lay out a clear path of growth going forward.

Marcus Turner Jones is an investor based in Buenos Aires

The post UK troubled by inflation and weak pound appeared first on International Finance.

Marcus Turner Jones

September 23, 2016: Venezuela remains in crisis, facing the largest demonstrations that the country has ever seen.

The scale of the crisis has caused President Nicolas Maduro to declare a ‘constitutional state of emergency’, with rival pro and anti-government activists taking to the streets of Caracas.

In calling the state of emergency, the President declared that he was aiming to ‘tend to our country and, more importantly, to prepare to denounce, neutralise and overcome the external and foreign aggressions against our country’. He refuses to rule out the prospect of a foreign invasion of Venezuela.

Although Maduro has his supporters, anti-government demonstrations too are widely attended. Many believe that he’s clinging to power while the country around him (and particularly the poorest people) is faltering. At the turn of the century, some experts thought that Venezuela’s economy would boom. Now, however, many people can no longer afford healthcare or food.

There is a shortage of products, energy and food. There is no sign that the situation will improve soon. So, what does the future hold for Venezuela, and how will the instability affect the global finance markets in the near future?

Economy shrinking         

-“The protests started in 2014 and have intensified since”. When the protests started to reach a critical stage in 2015, they had a severely detrimental impact on the national economy.

In 2015, it shrank by 5.7%, and experts, such as the International Monetary Fund, predict that it will shrink by an additional 8% this calendar year.

This isn’t the only issue, though. Many citizens can no longer afford to feed themselves. According to a Bloomberg report, inflation is expected to reach 700% this year. When we add the fact that many civil servants are being forced to work only two days a week, the economic outlook doesn’t look like improving any time soon.

However, it’s not just the basics that are in short supply. Plummeting oil prices have left the country in a dire financial state. Unlike in the Middle East, Venezuela’s oil is of relatively low quality. This means that, as the price for higher quality oil has been lowered, Venezuela is less competitive. However, what’s interesting is that, in spite of having serious economic problems, and in spite of its citizens having little to no access to medical care, the country pays billions to its bond holders. It’s this security of the investment that make them an increasingly attractive option.

Due to the economic turmoil, it’s perhaps unsurprising that Venezuela is suffering power shortages. Admittedly, these were relatively commonplace under the Chavez regime, but Maduro’s government have also introduced rolling blackouts, which are making the situation far worse.

However, while opposition figures and rebels blame corruption and mismanagement, Maduro and his counterparts are blaming epic droughts and record lows in the Guri hydroelectric dam, which provides 75% of Venezuela’s electricity.

As protests continue to escalate and as life gets worse for ordinary citizens, the end game for the Maduro government appears close.

Confusion over dual forex rate

This year, Venezuela introduced a dual forex rate. It now has one fixed rate, at 10 bolivars to the dollar, and one ‘floating rate’ starting at 200 bolivars.

In spite of the introduction of the new rate, the government maintains that it does not have solvency issues, claiming that it is trying to religiously hone foreign debt to prevent further cash flow issues.

Currencies and price controls have historically been a major issue for Venezuela, and these issues are amplified due to the current turmoil.

However, although the dual rate is helping assuage some of Venezuela’s problems, it’s causing issues for overseas businesses and governments operating in the country. This is because of the lack of clarity and confusion.

For example, if you went out for drinks and opened a tab at a bar, you could spend as little as £4 for the night on one exchange rate, or as much as £140 on the other.

The alternative exchange rate devalued the currency by 70% and has led to a huge dilemma for businesses. Do they pull out their money at this weaker exchange rate or wait for a stronger rate that the government promised them?

Each international company must decide how to value their Venezuelan assets and cash. Depending on the scale of the company, this can make a huge difference, as Bloomberg outlined. For example, Spain’s Telefonica SA, who own and run the Movistar phone system used in Venezuela, took a hit of $3.2 billion this month when it switched from the stronger rate of 12 bolivars per dollar to 50. This rate also no longer exists. In addition, Kimberly-Clark Corp. said the declining currency cost it $462 million. Clorox Co. pulled out of the country in 2014 leaving it further strapped for cash, with more businesses set to flee.

At present, it appears as though the instability will intensify alongside the protests. So, on an international scale, it would seem like we will see even greater withdrawals from Venezuela by large multi-nationals, which will in turn bring greater instability to financial markets. Perhaps, only when the fate of President Maduro is clear will we finally see stability both domestically and internationally in financial markets.

Marcus Turner Jones is an investor based in Buenos Aires

The post Inflation in Venezuela is expected to touch 700% appeared first on International Finance.