Central bankers adopted a more hawkish tone at an industry get together last week, warning that the era of low rates and modest inflation may be at an end following the double whammy of Russia’s invasion of Ukraine and the Covid shock. Gloom still dominates global headlines: US consumer confidence deteriorated amidst inflationary concerns, while price pressures continue to build in the Eurozone.
Soaring inflation cast a shadow over business sentiment. Fresh PMIs released last week reinforce the view that UK economy is flatlining as growing uncertainty about the rising cost of living eats into consumer spending intentions. The squeeze on households’ real incomes is pushing up wage demands with rail workers on strike last week. On the pandemic front UK is experiencing another surge in infection rates.
The OECD’s updated outlook revealed that we are on course to be the stagnation nation, as new forecasts suggested the UK would experience the weakest growth in the G20 outside Russia next year. Why? Well, a combination of factors – high inflation, rising rates and increasing taxes. In the meantime, a further rate hike from the Bank of England is anticipated later this week, even with a weaker GDP figure this morning. Meanwhile Brexit afficionados wait with bated breath on the PM’s plans to scrap parts of the NI Protocol.
Today sees the release of May data from the Ulster Bank Northern Ireland PMI®. The latest report – produced for Ulster Bank by S&P Global – signalled reductions in output and new orders as steep inflationary pressures hit demand. Indeed, output price inflation was at a record high. The impact of price pressures also hit business expectations, which turned negative. On a more positive note, employment continued to rise.
After sizzling-away throughout the pandemic, the UK housing market may finally be losing some of its heat: the cost of living crisis and higher interest rates are squeezing demand, with mortgage approvals sliding to the lowest level in two years. Meanwhile the EU decision to tighten the embargo on Russian oil by year-end drove Brent crude prices to the highest level in months. Locally, SSE gas customers were warned of a hefty 42.7% price increase coming into effect next month. Ouch!!
Last week brought good and bad news for households facing a cost of living crisis. First, the bad: Ofgem gave early warning that it expects to raise the default tariff by an eye-watering 42% in October. That will push typical gas and electricity bills to £2,800. Better news comes from the Chancellor of the Exchequer, who unveiled a fresh package of measures to support households (with giveaways partially funded by a windfall tax on oil and gas companies). It’s big, timely and well targeted. The burning question is: will these new fiscal measures add fuel to the inflationary fire or not?
Inflation has soared again in April and the UK now has the highest rate of inflation in the G7. European as well as UK households are enduring a cost-of-living crisis; and for the UK the situation is set to worsen in October when energy price cap is expected to be raised again. In the meantime, the global food system is under threat due to the war. Wheat prices surged further, after India – the world’s second largest producer – said it would suspend exports. Hadly surprising then that the mood is darkening.
March GDP data signals that economic activity is losing steam as the cost of living crisis begins to bite. With a bigger squeeze still to come, the spectre of stagflation looms large and unwanted attention is falling on the Bank of England over untamed inflation. Worries are certainly mounting, with China’s strict lockdowns weighing on global trade and April’s inflation figures – the first to include the 54% energy price cap jump – expected to show another sharp rise.
As central banks around the world tightening monetary policy, our own Bank of England warned that the UK economy could enter a recession. Yet inflationary pressure continue to build; the G-7 countries pledged on Sunday phasing out or banning the import of Russian oil (the EU, US and UK made similar announcements before). Meanwhile Northern Ireland’s electorate waits to see when / if Stormont’s Executive can be restored. After all, there are no shortage of difficult issues to get stuck into.
Weaker than expected Euro area growth, unexpected contraction of the US economy and concerns about the Chinese economy, clouded the outlook last week. In the week ahead, the Bank of England is facing the toughest balancing act between curbing recent record high inflation and not weighing too heavily on GDP growth amid a cost-of-living crisis.
