Bank of England Will Have No Choice but to Act Like Dracula

 | May 19, 2017 | 9:00 AM EDT
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U.K. Prime Minister Theresa May's Conservative Party looks set to win the June 8 general election, which she triggered to strengthen her power base in parliament ahead of the Brexit negotiations with the European Union. But her party's manifesto, released on Thursday, indicates that the Bank of England most likely will need to rescue the British economy again.

Albert Edwards, the renowned bearish analyst from Societe Generale, wrote in a research note on Thursday that "despite presiding over the biggest economic and financial crisis since the Great Depression, most central banks have shown the humility of Dracula" as "they have turned the global economy into the economic equivalent of a living death."

"Like vampires, they show no remorse nor do they seek redemption; instead, they move swiftly back to that deadly embrace, again and again."

The Bank of England may need to do just that after the election. One thing the U.K. economy had going for it was the ease of doing business. There was little government interference in the business environment compared with other European countries and businesses were relatively free to hire talent from anywhere in the world.

It looks like things will get tougher in the next Conservative government. May's manifesto has maintained a pledge to reduce net migration to the tens of thousands from more than 270,000 currently and promises to double the Immigration Skills Charge -- a tax levied on companies employing non-EU migrant workers -- to £2,000 ($2,590) a year.

Other measures to bring immigration down will be raising the earnings thresholds for people who want to sponsor family members to come to the U.K. and toughening visa requirements for students. Also, "we will expect students to leave the country at the end of their course, unless they meet new, higher requirements that allow them to work in Britain after their studies have concluded," May's manifesto says.

This approach is likely to weigh on businesses, which already have criticized the Conservatives' stance. The influential British Chamber of Commerce said the proposals will increase regulatory obligations, costs and uncertainty for businesses.

"The Conservatives' proposed approach to immigration, at a time when many firms are already doing everything they can to train up and employ UK workers, will worry companies of every size, sector, region and nation," Adam Marshall, director general of the British Chambers of Commerce, said in a statement.

These worries are backed up by data from jobs search engine Adzuna, which show that some jobs in the U.K. go unfilled for more than three months. More than 20% of jobs in science and quality assurance in the U.K. remain unfilled after 90 days, followed by 9.5% in health care and nursing, the research showed.

London is the worst hit by the talent drought, with 5.5% of positions unfilled after 90 days, followed by eastern England and the north east of England, with 4.9% of vacancies unfilled. These are highly skilled, highly paid positions -- the kind of jobs for which any country is vying to attract talent.

As the U.K. leaves the European Union and cracks down on foreign workers, the talent shortage could become so bad that companies could decide to move their operations to friendlier places. Coupled with uncertainty hitting confidence and rising inflation eroding purchasing power, this talent shortage cannot be good for the economy.

Edwards said that the fact that U.K. inflation increased because of the pound's slump after the Brexit referendum should be celebrated because it means that it drives the U.K. "away from the deflation tipping point." A squeeze on U.K. wages also should be celebrated for the same reason, he said.

This may well be the case for the short term. For the longer term, however, an environment that is increasingly hostile to business does not bode well for economic growth. If a shortage of skills and additional regulatory burdens hurt investment, the Bank of England will have no choice but to do a Dracula again and print some more money. The British pound (GBP) has just strengthened above the psychologically important $1.30 level. If the Conservative manifesto becomes actual policy, the currency won't stay there for long. 



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