Chancellor Jeremy Hunt’s Budget appears to have gone down rather well with global markets as the cost of buying UK debt has steadily fallen since his announcement and the UK market has reciprocally risen in the past week or so.
It is becoming evident that the UK is now in a mild recession, although data from the Office of Budget Responsibility (OBR) suggests a 2% overall reduction in GDP is expected, well below the 6% fall in GDP in 2008/09.
A fall in the yield on UK Gilts – the governments favored instruments to raise capital, remains key to the continued support of UK markets. Hopefully the UK can slowly rebuild its credibility in managing its own finances. You could argue this was the Chancellors first objective in his budget speech. To put this in context, the UK 10-year Gilt yield has fallen from 4.51% to 3.11%, meaning a reduction in the cost of servicing this debt of 31%. Good news for foreign holidays as well as the pound sterling has risen from 1.07 to the dollar to over 1.20. Adding in the expectation for falling inflation next year as we move past the large energy price rises in April 2022, then the outlook starts to look brighter.
The second objective of the budget was to give the Conservatives a fighting chance of re-election in 2024 and to underline a more caring government for those that need the most help. Under the election cry of “we are asking more from those that have more”, the level at which additional rate of income tax was payable will be reduced from £150,000 to £125,140 next year and the freeze on income tax bands will move many more people into higher tax bandings. Added to this state pensions and benefits were increased by 10.1%, underlining that the previously questioned triple lock remained firmly in place and central to the promises of a Tory leadership.
To be blunt, the third objective was to blame someone else. He finished his speech by referring to a recession made in Russia and trying to steer the public to the view that the issues we are facing are more global by nature. Whilst Russia’s invasion of Ukraine has greatly contributed to the current state of peril, the Truss regime is hard to ignore in adding further fuel to the fire. Once more we return to objective two – try and salvage hope for the next election. It wasn’t our fault, it was Putin. The next eighteen months will show if this is indeed possible. It can be no coincidence that the worst of the tax freezes and spending cuts are delayed until after the next election, when hopefully inflation will have receded, and a recession is at an end. Therefore, sensible timing one could say, rather than electioneering.
COP27 certainly seems to be a little lower profile than last year’s event, possibly due to location and other events in the world competing for headlines. If you thought that hundreds of private jets flying into Sharm El Sheikh for the conference was in itself not particularly good news for the environment, it was further interesting to read US House speaker Nancy Pelosi’s comments. When attending COP27 she spoke about how much work there is still to do on fighting climate change when “as you would say there is a disagreement on this issue with Democrats and Republicans, they all say (climate change) is a hoax and we have to get past that”. Oh dear, it appears there remains great progress to be made on this incredibly important topic.
Back on the subject of interest rates, US equities had a welcome bump to finish the month as US Federal Reserve (FED) Chairman Jerome Powell sent a strong signal that the FED will slow the rate of interest rate rises, although he did also add that there was still some way to go in their fight against inflation. Mr Powell stated that a moderation in the pace of rate rises could come as soon as the next meeting in mid-December, as he stated “my colleagues and I do not wish to overtighten”.
Ultimately, we have our fingers crossed that the UK Government can mature quickly and, at the end of the day, stop doing things that defy logic. The aforementioned OBR are suggesting that Brexit was possibly not the great idea it was hoped it would be, stating “the latest evidence suggests that Brexit has had a significant adverse impact on UK trade, reducing both trading partners and trading volumes”. The OBR went on the state that “Brexit will result in the UK’s trade intensity being 15% lower in the long run than if the UK had remained in the EU”. Brexit was sold on the basis of a brave new world and we can compare a similar sentiment to the ultimate damage done by Kwasi Kwarteng’s mini-budget and we can understand the current clamor for a period of calm reflection and common sense. This week it was incredulous to read that UK Treasury officials did not know what was in the September mini-budget and were therefore unable to brief the Bank of England on the overall scale of fiscal loosening it contained.
We expect inflationary pressures to continue to recede – natural gas prices have fallen some 40% since their peak in September. Central banks are purposefully creating a recessionary environment to cool demand and tame inflation, so once this process results in consistently month on month lower levels of inflation, the central banks can then quickly reverse their rate rises to support the economy. Our job is to invest sensibly and without taking undue risks until this moment arrives, and we are feeling more and more confident that this moment is not too far away.
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