Berenberg Bank don’t believe the UK is facing two years of painful stagflation, as the Bank of England’s forecasts suggest.
The UK economy typically shows a high degree of cyclicality, they point out, in a note to clients. Real GDP performance is either good or bad, rather than simply mediocre.
So Berenberg reckon growth will either remain robust, or the UK will fall into either a technical or full-blown recession.
The first is more likely, they say, but “amid darkening clouds”, the risks of a bad outcome are growing.
According to Berenberg, there’s now a 25% chance of a genuine downturn:
A short technical recession followed by a recovery thereafter would not be a drama. The more serious risk to watch is that the UK suffers a genuine downturn with a sharp and protracted fall of real GDP as well as visible damage to other parts of the economy such as the labour market, housing and production.
On a one-year horizon, we see a 25% risk of such an outcome. It could happen if any the three major global risks materialises: 1) an immediate EU gas embargo against Russia; 2) prolonged large-scale lockdowns in China that disrupt global supply chains; or 3) an overtightening by the US Fed – although that is probably more of a threat for 2023 than 2022.
Prime minister Boris Johnson has warned there is a difficult period ahead, but hasn’t revealed any fresh help to support struggling families.
Interviewed on Sky News following yesterday’s local elections, Johnson was asked what he’ll do to address the economic pain to come as inflation rises to 10%.
Johnson says inflation has spiked around the world, driven by the cost of energy, and that the UK hasn’t invested enough in domestic energy security, by neglecting nuclear power and not pushing renewables fast enough.
I’m not going to pretend that there isn’t going to be a difficult period as we come through the aftershocks of Covid. There is.
But fixing supply side issues, especially on energy security, will protect people in the future, he adds.
Q: Why not do a windfall tax on energy companies, so we can help people now?
Johnson reveals he had the heads of Shell and BP in yesterday, and told them the country needs them “invest massively in clean, green renewables, in stuff that will make a difference to energy prices”.
Johnson cites windfarms and hydrogen, to ensure supplies are protected in the future.
And he adds that ‘clobbering’ energy firms doesn’t make sense:
“What the country needs is a government that will take a big decision about how to fix our energy supply, and you don’t do that simply by clobbering the companies that we need to make investments in our domestic energy security.”
[Projects are already underway, though. BP’s spending £18bn on North Sea oil and gas, offshore wind, hydrogen facilities, electric vehicle charging points and carbon capture projects, which wouldn’t stop if there was a windfall tax].
Johnson didn’t announce any fresh support, but did say £22bn is already being provided.
That total includes changes to the Universal Credit taper rate, the rise in National Insurance thresholds, the cut to fuel duty, the council tax rebate, and the £200 energy bill discount which will be repaid on charges levied in future years.
Our Politics Live blog has full details:
Morrisons has put forward a last-minute rescue deal for the McColl’s convenience store chain that could protect 16,000 jobs.
The supermarket chain is understood to have offered to take on the ailing business as a going concern, assuming its debts, which amount to about £100m, and taking responsibility for its pension scheme, which had a deficit of about £3m when it was last assessed in 2019.
Morrisons’ deal was put forward late on Thursday night after McColl’s, which has more than 1,100 small shops around the UK, including about 250 Morrisons Daily outlets and a number of Martin’s, warned it was “increasingly likely” to call in administrators.
Here’s the full story:
Q: What would it take for the Bank of England to pause its interest rate rises?
BoE chief economist Huw Pill says the Bank wants to see greater evidence that inflation expectations, wage and price rises, and economic momemtum were more consistent with its inflation targets (to get inflation back to 2%).
Pill tells CNBC the Bank expects underlying wage growth to rise further in the next few quarters, for firms to pass on their cost increases to consumers, and corporations to attempt to restablish their profit margins.
That’s all natural in this economic environment, Pill says. But if they start to “run away, or become unanchored like in the 1970s”, then more rate rises could be needed.
Here’s a clip from his interview with CNBC’s Julianna Tatelbaum.
The Bank of England faces a tricky decision on how high to raise interest rates without hurting an economy on the brink of recession, says chief economist Huw Pill.
Pill has told CNBC TV, following yesterday’s interest rate rise, that:
“It’s a tricky balance to seek in current difficult circumstances.
And the arguments around where rates should be set in order to achieve that balance are quite finely balanced in themselves.
Pill wouldn’t comment on fiscal policy (government spending and tax policy), but pointed out monetary policy (setting interest rates) has its limits.
That’s why there’s pressure on Rishi Sunak to work on an emergency budget to help families with rising costs of energy and food.
Pill added the Bank is also worried about ‘secound-round effects’ — the classic wage-price spiral where inflation pushed up earnings (as workers try to protect themselves from the cost of living squeeze).
Bloomberg has the details:
“We have been surprised by the strength in the labor market — and expect it to tighten further,” Pill said. “So there are second round effects. There is a risk that inflation becomes more self-sustaining — and that is something we have to guard against.”
He rejected comparisons with 1970s stagflation, despite BOE’s the forecast showing double digit inflation and flat growth for two years.
“We are not headed in that direction,“ Pill said. “The reason is that the monetary framework — introduced 25 years ago — has been transformational” and policy makers now are adept at spotting and fighting inflation.
UK builders have been hit by a slowdown in new orders, another sign that economic growth is slowing, towards the brink of recession.
Construction companies say the speed of recovery lost momentum last month, as higher costs and worries about the economic outlook hit demand.
Worryingly, business optimism in the sector is now the weakest since September 2020, as prices of energy, fuel and raw materials jumped again.
Firms continued to suffer supply chain delays, due to shortages of staff, materials and transport, port delays, and the war in Ukraine, according to the latest PMI survey of construction firms.
Tim Moore, economics director at S&P Global, which compiles the survey said housebuilding took the biggest hit.
“The construction sector is moving towards a more subdued recovery phase as sharply rising energy and raw material costs hit client budgets. House building saw the greatest loss of momentum in April, with the latest expansion in activity the weakest since September 2021.
Commercial and civil engineering work were the most resilient segments, supported by COVID-19 recovery spending and major infrastructure projects respectively.
There were major delays and gridlock at the Port of Dover last month, partly due to an IT problem in the government’s new trade portals, used by hauliers when shipping goods to the EU.
This added to queues caused by the suspension of P&O Ferries services after it sacked almost 800 staff, in the Easter getaway.
Here’s a video clip of Conservative Chairman Oliver Dowden denying the UK faces an economic horror story (see earlier post).
Airline group IAG are the top faller in London, down 8%, after scaling back its expansion plans after the chaos at UK airports over Easter.
IAG, which owns British Airways, has trimmed its full-year group capacity guidance after it (and other airlines) cancelled hundreds of flight last month, due to shortages of crew and ground staff ill with Covid-19.
That disrupted holiday plans for many families. So IAG now plans to ramp up capacity more slowly, and only fly around 80% of 2019 levels this year, from its February forecast of 85%.
Fewer flights could mean less disruption and cancellations, and provide ‘more stability’.
IAG also told the City that the recovery in business travel and trips by wealthy passengers will return it to profitability this quarter, after suffering an operating loss of €731m in Q1.
European stock markets have fallen in morning trading as recession fears worry investors.
In London, the blue-chip FTSE 100 index is down around 50 points, or 0.65%, at 7454 points, while the Europe-wide Stoxx 600 has lost 1%.
That follows a jolting slump on Wall Street last night, where fears that central bankers will push economies into recession saw the Nasdaq register its biggest one-day decline since June 2020.
That warning from Roger Lee, head of UK equity strategy at Investec, that “this is really the sum of all our fears” highlights just how worried investors are about the Bank’s forecasts.
AJ Bell investment director Russ Mould, says:
“Concern about inflation is the culprit, as ever, and the wild swings we’ve seen this week are a reminder that sentiment is about as fragile as a porcelain doll.
“The other fear is that the cure for inflation, higher rates, could be as bad as the disease if they choke off growth and even lead to recession.
Conservative party chairman Oliver Dowden says we should maintain a sense of proportion, insisting the UK isn’t facing an economic horror story.
Speaking on Radio 4’s Today programme, Dowden says the UK is facing challenges of a scale not seen for at least 40 years.
He says inflation is being driven up by supply chain pressures as we recover from Covid, the lockdowns in China, and increase in oil and gas prices due to the crisis in Ukraine.
Dowden says he has “read and fully accepts” the Bank of England’s analysis (which sees inflation over 10% by the end of this year, unemployment rising to 5.5%, and GDP shrinking in 2023).
We are facing an unprecedented global inflationary challenge, and that does demand unprecedented action from the government.
That’s what we’ve done with the £22bn of support we’ve provided.
Q: In the face of this latest economic horror story, shouldn’t a Conservative government be cutting taxes (as some cabinet ministers argue) not putting them up?
Dowden replies that we need to have a bit of sense of proportion about the situation.
I don’t accept your characterisation of this being an economic horror story.
He argues that not locking down last winter means the economy is in better shape than it would have been.
Q: Are you saying it’s not bad?
Dowden repeats that we need “a correct sense of proportion about this” and he doesn’t accept it’s a horror story.
[But if you can’t afford to feed your family, or heat your home, or lose your job, surely it is?]
Q: Roger Lee, head of UK equity strategy at Investec (a major investment group) has said the Bank of England’s forecasts are “the sum of all our fears”, with growth forecasts downgraded, inflation expectations upgraded and interest rates still going up.
Dowden says the UK faces an “unprecedented challenge of global inflation” from the recovery from of Covid and the Ukraine war, and the British people want the government to focus on those challenges and show bold leadership.
Q: Why not show bold leadership and cut taxes?
Dowden claims they have cut taxes, pointing out that Rishi Sunak lifted the threshold where people pay national insurance (by £3,000 to £12,570, from July) in the spring statement, cut fuel duty (by 5p per litre), and will cut income tax to be cut to 19p by 2024.
On those points…Lifting the NI thresholds will mean workers earning under £35,000 are taxed less. But, overall, that £6bn cut in national insurance is more than wiped out by the £12bn increase in tax from lifting the NIC rate by 1.25 percentage points (the new health and social care levy).
The Office for Budget Responsibility has calculated the UK tax burden is heading for a 70-year high.
And overall, the lack of support for low-income families in the spring statement means 1.3 million people will be pushed into absolute poverty next year.
The pound has slipped to a new two-year low this morning, after its worst day since the Covid-19 pandemic began in 2020.
Sterling has dropped another half a cent to $1.23, the lowest since June 2020.
It’s being hit by the risk of a recession, and predictions that the Bank of England won’t raise interest rates as fast as previously thought, given the very gloomy economic outlook.
The cost of living crisis, and Thursday’s interest rate rise, will soon weigh on house price growth, says lender Halifax.
Prices climbed by another 1.1% in April, the 10th monthly rise in a row, Halifax’s latest house price report shows.
Average property prices hit another new record high of £286,079, up £47,568 over the last two years.
But that post-lockdown property boom could fade as incomes are squeezed, and the cost of borrowing rises, says Russell Galley, managing director at Halifax.
“For now, at least, despite the current economic uncertainty, the strong increases we’ve seen in house prices show little sign of abating. Demand in the housing market remains firm and mortgage servicing costs are relatively stable with fixed-rate deals making up around 80% of mortgages on homes across the industry, protecting many households from the effects of rate rises so far.
“However, the headwinds facing the wider economy cannot be ignored. The house price to income ratio is already at its highest ever level, and with interest rates on the rise and inflation further squeezing household budgets, it remains likely that the rate of house price growth will slow by the end of this year.”
The best way to help struggling families through the cost of living crisis is to uprate benefits now in line with this year’s surge in inflation, the Resolution Foundation says.
Benefits such as Universal Credit and the state pension only rose by 3.1% in April, as they’re based on last September’s Consumer Price Index, so are already lagging behind inflation (which hit 7% in March).
That mechanism means they should rise higher next April — but that’ll be too late for families struggling now.
Resolution says Rishi Sunak should bring forward next year’s increase:
While the Chancellor can’t shield everyone from impact of higher inflation, he has plenty of scope to provide more targeted support for the low-and-middle income households worst affected by this cost of living crisis.
The best way to do this is through the benefits system. Here bringing forward next April’s benefits uprating – currently project to be around 8-10 per cent. For example, an 8 per cent uprating in benefits would be the equivalent to around £600 a year on the basic state pension and over £300 a single adult’s basic Universal Credit. While even this may not be enough to fully cover the October price cap rise for many – or indeed other increases in the cost of living – it would be a major intervention. It would also have the added bonus of no longer-term cost for the Treasury.
Resolution also warn that nine million English households would be in ‘fuel stress’ this autumn, with the Bank forecasting Ofgem’s price cap will rise to £2,750 in October, up another 40%.
The risk of a UK recession dominates today’s front pages:
The Mirror points out that the TUC are calling for an emergency budget to help families with the cost of living crisis.:
The Times report that one cabinet minister says Rishi Sunak should cut VAT to stimulate the economy and help people.
“A recession feels inevitable, we may already be in one. What we’re hearing from retailers is horrifying, prices are going through the roof.”
Good morning, and welcome to our rolling coverage of the business, the world economy and the financial markets.
Pressure is growing on the UK government to do more to protect struggling households from a looming recession, as cost of living crisis hammers the economy.
Economic fears are swirling, spooking the markets, after the Bank of England warned of a “very sharp slowdown” yesterday, even as it lifted interest rates to a 13-year high of 1%.
With inflation heading to a 40-year high of 10%, unemployment set to hit 5.5% by 2025, the outlook is dire — sending the pound slumping to two-year lows.
The Bank also pointed out there was little it could do to help with the unprecedented jump in energy bills, and the second-biggest fall in living standards on record.
As BoE governor Andrew Bailey put it to CNBC:
“We’re seeing this unprecedentedly large shock to real income in this country coming from abroad, it’s a terms of trade shock.
And that is having a negative effect on real income, we think that’s going to feed through to activity during the course of this year in a big way,”
Households face an average £1,200 hit to take-home pay.
Labour urged ministers to act, with new measures such as a windfall tax on energy company’s excess profits (with Shell and BP both posting bumper earnings this week).
Rachel Reeves, the shadow chancellor, said the government was out of ideas and out of touch.
“Not only are ministers shrugging their shoulders at the spiralling cost of living crisis, they’ve made it worse by hitting working people and businesses with 15 Tory tax rises that will further stifle our economic growth.”
Boris Johnson admitted on Tuesday that the government “can do more” to help families struggling with the cost-of-living crisis, during his bruising interview with ITV’s Good Morning Britain.
The I, though, reports that Rishi Sunak will not intervene before the next Budget to try and stop a recession.
The Chancellor believes that the rise in interest rates – which were hiked to 1 per cent on Thursday – makes it dangerous to increase public borrowing in order to spend more or cut taxes, because the cost of servicing the country’s debts is growing.
Fears over the global economy are rising too, as China’s growth slows and Russia’s invasion of Ukraine continue.
The BoE’s forecasts alarmed markets, explains Jeffrey Halley at OANDA, starting a “massive risk aversion wave” which saw the worst year on Wall Street this year.
It’s what they said, and not what they did, that saw Sterling slump by 2.0%. The bombshell was the 2023 growth forecast, which was marked down massively to -0.25% from 1.25% previously.
The BOE basically said there was going to be a recession next year, somewhat at odds with the Federal Reserve’s statements that a soft landing was possible in the US. Overnight BOE officials basically said they were going to concentrate on tackling inflation because there wasn’t much, they could do to offset a slowdown.
Fears of a ‘hard landing’ wiped over 1,000 points off the Dow Jones Industrial Average, which lost 3.1%, while the tech-focused Nasdaq Composite slumped almost 5%.
The steep fall came one day after the Fed chair, Jerome Powell, announced the sharpest rise in interest rates in over 20 years, and said the Fed needed to do “everything we can to restore stable prices”.
European stock markets are set to open lower:
- 7am BST: Halifax house price index for April
- 9.30am BST: UK construction PMI survey for April
- 1.30pm BST: US Non-Farm Claims payroll report