It’s MPC week again. Although much of the turmoil that Bank of England had to grapple with in its November decision has now faded, it still faces a finely balanced decision. The UK has the worst growth outlook among the G7, its workforce is shrinking, buffeted by the impact of Long Covid, and inflation expectations have risen. While the festivities are masking some of this, fears over a post-Christmas slump are on the rise too.
Today sees the release of November data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by S&P Global – showed that inflationary pressures and a wider economic slowdown led to further reductions in output and new orders in the Northern Ireland private sector. There were further signs, however, of inflation softening as both input costs and selling prices rose at the weakest rates in 21 months.
Some mild respite for businesses as last week’s data suggests some easing of price pressures. Energy crisis concerns are also at their lowest since Feb’22 when the war in Ukraine began. But consumers remain cautious, staying away from taking more debt or running down savings. Too bad, for those lucky enough to have accumulated some Covid savings, they’d be of real benefit to the economy. Thankfully, holiday spending in the final weeks of the year should spur some gains.
Prior to the pandemic, new car sales used to be a useful and timely barometer of consumer confidence. But the supply chain disruption following Covid-19 and the Ukraine-Russia war ended that. The latest month’s new car sales are, in many cases, a reflection of consumer demand and confidence prevailing in the summer of 2021. The reality of consumer confidence today is severely dampened by the omnipresent cost-of-living crisis and higher interest rates.
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.
Sorry, no Jamie Dornan or Gillian Anderson on this podcast. Just an economist and a mortgage broker chewing the fat.
‘The Fall’ refers to the continued fall in output, confidence and living standards amongst other things. We will major on the local mortgage market in a bit.
In this episode we are delighted to be joined by Siobhan McAleer Managing Director of The Mortgage Shop – which Siobhan founded in 1992 and which has become one of the largest mortgage brokerages in Northern Ireland and which has branches in Great Britain / Mainland UK.
But first reflecting on another month and we had not one but two fiscal events.
The UK economy is already struggling for traction but prominent voices in the Bank of England indicate a little bit more tightening in rates is on the way. As the holiday season approaches, some seasonal improvements in spending and hiring are likely. But these should not be mistaken as signs of a recovery. That, unfortunately, is still a long way off. But the UK is not alone in its woes. Waning economic momentum and high inflation are firmly problems shared.
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.
Continue readingToday 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.
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.
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.
