UK Economy to Ride Out Rail Strikes Unscathed says Leading Economist

"The money that people do not spend on these services this week likely will be redeployed, either to next week, or to purchase other goods and services" - Pantheon Macroeconomics.

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UK rail strikes and the promise of further industrial action are said by one currency strategist we follow to be yet another reason to steer well clear of the Pound, however one leading economist argues the impact caused by strike action to the economy will be negligible.

The rail strikes that got under way on Tuesday will be the biggest in the UK for more than 30 years and will inevitably impact negatively on economic activity at a time of surging inflation and slowing growth.

"The rail strike risks turning ongoing operational headaches into a fully blown migraine for the hospitality industry," says Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.

"Restaurants, bars and hotels were already struggling under the strain of sky-high energy prices, supply chain disruption and the ongoing labour crunch, and now the mass walkouts are set to cause fresh financial pain," she adds.

One foreign exchange strategist says the industrial action is yet another reason to steer clear of Pound Sterling.

"Large-scale industrial action across UK rail networks started in earnest today — the beginning of a trend which is likely to exacerbate 'stagflationary' pressures in the UK economy, and make us even less willing to be long of the GBP," says Stephen Gallo, Head of European FX Strategy at BMO Capital Markets.

The strikes will see 24-hour walkouts by members of the RMT union on Tuesday, Thursday and Saturday.

In addition, a London Underground strike took place on Tuesday.

The RMT strike will likely involve 40K signallers, maintenance and train staff working for Network Rail and 13 train operators.

"Businesses also face being dragged down by a slightly different combination of factors — spiking fuel prices exacerbating a labour shortage, which will weigh on profits and limit their ability to raise wages in line with inflation. This vicious cycle could help tip the UK into recession in a matter of months," says James Andrews, personal finance expert at Money.co.uk.

While the strikes are expected to impact the UK economy the extent of the hit is debatable.

"We still see no reason to pencil-in a meaningful hit to economic activity from the nationwide rail strikes underway this week," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

Tombs is consistently rated one of the best UK economic forecasters by Bloomberg and was ranked the most accurate UK forecaster in 2020 by Refinitiv (formerly Reuters).

He acknowledges the strikes will reduce revenues for train operators and some consumer services businesses, such as restaurants in city-centre locations.

"But the money that people do not spend on these services this week likely will be redeployed, either to next week, or to purchase other goods and services," he says.

The current round of industrial action comes in the wake of the Covid pandemic which resulted in a significant upheaval in how businesses and employees operate and in shopping habits.

"During the rail strike, many of those who can work from home will, ironically, end up better off having avoided shelling out money on fares or even petrol if offices are closed," says Andrews.

"The ease with which many staff in the business, financial and professional services sectors now work from home also suggests that GDP will be largely unaffected," adds Tombs.

For now the strikes are limited to the rail network but reports suggest more sectors will set up their own picket lines.

But it is reported more than 115K Royal Mail postal workers have joined RMT union leader Mick Lynch’s call for a "co-ordinated" general strike "across every town and city in Britain".

Teachers, nurses, NHS workers and barristers are also threatening to strike.

But Pantheon Macroeconomics suggests even a general strike scenario won't pose a significant headwind to economic growth.

"Admittedly, rail strikes might represent the start of a broader set of walk-outs afflicting heavily-unionised sectors. Nonetheless, the proportion of workers who are members of a union has fallen to 21%, from 25% ten years ago and a peak of 53% in 1980," says Tombs.

"Disruption, therefore, will be nowhere near as widespread as in the 1970s and 1980s," he adds.

Above: Working days lost, UK since 1891, in millions, this is the most recent data on industrial action from the ONS. "The highest number of working days lost in the UK was in 1926, the year of the general strike" - ONS.

Pantheon Macroeconomics' analysis shows it is almost impossible to discern any impact on the economy from the last major set of strikes in 2011, when up to two million public sector employees walked out over pension reforms.

Despite some 62% of state schools closing and 23% of routine hospital operations cancelled on November 30 2011 GDP still rose by 1.1% month-to-month.

"All told, then, we doubt that the current bout of industrial action will be visible in the macroeconomic data," says Tombs.

For the Pound, if this assessment is correct, the impact could be minimal.

The Pound is nevertheless subject to investor sentiment and international investors could simply shun it as they add industrial action to the list of reasons to be gloomy on UK assets.

On this basis the strikes could yet still count against the Pound.

"Another beautiful morning in Athens; my last, sadly. I’ll get back to the rail strikes this evening. Sterling has few friends when you wander around seeing clients," opines Kit Juckes, head of FX research at Société Générale.

"Either way it's a basket case," he says of the Pound in a daily currency briefing dated June 21, "I expect we’ll break that post-referendum low in the coming years".