Chief Economist’s Weekly Briefing – Autumn Austerity

Last week’s limelight was on Chancellor Hunt who delivered a much-awaited path for fiscal consolidation. While this should assuage financial market concerns and pressure on the BoE to tighten rates, households will be hit hard. Sure, the OBR seems optimistic about the pace of recovery but that won’t materialise anytime soon. Plus, energy bills will rise again in April. More tough times ahead.

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The Great Rewind

Today saw arguably the biggest fiscal event since George Osborne became Chancellor. Then, we saw austerity 1.0 when the fiscal adjustment was split roughly 80% spending cuts and 20% tax rises. This time around, the current Chancellor, Jeremy Hunt, has gone for more of a 55:45 split (£30bn of spending cuts and £25bn of tax increases). Back then, the Bank of England’s actions in slashing interest rates, to what was then a record low, effectively softened the pain of austerity, therefore making it easier for the Chancellor to push forward with big spending cuts. This time around, the Bank of England is doing the opposite. This means that households are being hit from all angles in the form of interest rate rises, tax increases and spending cuts, whilst inflation is rampant. The Chancellor’s and Governor’s hands are effectively tied. Jeremy Hunt is walking a tightrope of shoring up the public finances in a way that limits the depth and length of the recession. For instance, the tax rises have been aimed at areas that will least impact economic growth, and spending restraint has been targeted outside of growth generators like capital investment. Moreover, the timing of this coincides with the next General Election, with spending increases (on health an education) and modest tax rises before, and spending cuts and significant tax rises after. Despite receiving a £650m Barnett consequential for the next number of years, Stormont still faces a fiscal black hole of probably the same amount for the current financial year.

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Coming back down to earth but into a different world

If we look at the last 14 years, the reality is that we have been in a bubble that has sent many things such as global property and equity prices to stratospheric levels. This bubble was created by extremely low interest rates and was pumped up further by other central bank actions including quantitative easing (QE). But now the bubble is deflating fast as interest rates rise due to soaring inflation, and we’re experiencing an extremely bumpy re-entry as we come back down to earth. But whilst we’re re-entering the higher interest rate environment of old, it is a manifestly different world.

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Chief Economist’s Weekly Briefing – Fall Season

Last week UK became the only G7 country in which GDP fell in the third quarter, having never recovered to its pre-Covid peak. But there’s worse to come. Chancellor Hunt’s return to fiscal orthodoxy entails tax hikes and spending squeezes that will be delivered in the Autumn Statement this week. Tighter fiscal and monetary policy will continue to weigh on household spending. Hopefully there are measures on Thursday that help pave the way for a recovery.

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Sharpest decline in new business since January 2021

Today sees the release of October data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by S&P Global – pointed to further reductions in activity and new orders amid ongoing cost pressures, while business confidence sank further. That said, companies continued to expand their staffing levels as part of efforts to rebuild workforce numbers following the pandemic.

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Chief Economist’s Weekly Briefing – All Doom and Gloom?

Interest rates continue their march upwards. Last week the Bank of England joined the bandwagon of advanced economies in delivering a sizeable 75bps interest rate hike. Nonetheless, a recession seems inevitable next year. The key question of how deep it will be depends on impending changes to taxes and government spending, the level of energy prices and the willingness of households to use their excess savings. All remain to be seen.

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Podcast Episode 22 – The kindness of strangers is wearing thin – with Gareth Hetherington – October 2022

The podcast that keeps you up to date with what is happening economy-wise in Northern Ireland.  Telling you what you need to know but not necessarily what you want to hear. It is better to be prepared for the economic environment we are operating in and not the world we would like to be in.

Featuring Gareth Hetherington – Director of the Ulster University Economic Policy (NICEP) at Ulster University.

Chief Economist’s Weekly Briefing – Flying blind

This week’s interest rate decision from the Bank of England will be the first since the September “mini-budget” announcement unleashed a period of political and market turmoil. Markets and economists are counting on a 75 bps hike—the largest since 1989, and a quantum the ECB chose to adjust its benchmark rate just last week. But the real pain for the MPC is forecasting the economic and inflation outlook amid the current uncertainty around the new PM’s pending fiscal strategy.

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The kindness of strangers is wearing thin

‘Taking back control’ has gone down as one of the most effective political slogans of all time. But turning that slogan into reality has proven to be much more difficult. The UK left the EU but doing so hasn’t brought the kind of sovereignty advantages Brexiteers had envisaged. Outside the EU, the UK’s destiny is still very much tied to forces beyond Westminster. What has become very clear in recent months is that the fate of countries like the UK is closely tied to the markets and that the markets will reward or punish you in equal measure depending on how you behave. 

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Chief Economist’s Weekly Briefing – Stability soon?

Change is the only constant in the UK. We now know who the new Prime Minister will be, and the Conservatives appear determined to press ahead with a pivot back in the direction of fiscal orthodoxy (cue the upcoming October 31st fiscal plan). But much of the the damage to the economy has been done – interest rates have risen sharply and growth indicators are on the slide. Sleepless nights again for the Treasury and BoE?

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