29 March 2022
Chancellor Rishi Sunak’s Spring Statement and lack of any major ‘giveaway’ may well have disappointed some investors, in spite of rising inflation.
On Wednesday, the Office for National Statistics (ONS) announced that UK CPI inflation reached 6.2% in February – the highest in 30 years. Further price rises are anticipated over the coming months, as mounting energy prices and ongoing supply chain disruptions continue to sting.
…and inflation observations
The knock-on effect of the inflation data on UK markets was a mixed bag. The FTSE 250 – which is highly exposed to the domestic economy – dropped by 1% by the close of the week, whereas the FTSE 100, whose companies produce nearly all their profits overseas, rose by 1.1% in the same period.
Despite the fact that Sunak made a number of concessions to help ease the persistent cost-of-living crisis, it’s uncertain as to whether these will be sufficient to both tackle rising inflation and have a veritable impact on the livelihoods of those most affected.
“Sunak met low expectations in his Spring Statement, with a 5p cut to fuel duty, removal of 5% VAT on solar panels, and a hike in the lowest National Insurance threshold. With the cost-of-living front and centre in most national political debates at the moment, this generally didn’t deliver on cross-party calls to soften the blow – with UK inflation now at 6.2% YoY and real household disposable income expected to contract by the greatest amount since the 1950s.”
One of the key communications on the day was that the basic rate of income tax would fall to 19% in 2024/25.
Paul Dales, Chief UK Economist at Capital Economics, said:
“This still leaves households having to absorb about a £20bn hit to their real disposable incomes from rising food, petrol and utilities prices by the end of 2023.”
He noted that the Chancellor could have done more to help ease the increasing cost of living, but observed: “He appears to be holding some cash back until closer to the 2024 election for political reasons.”
Last year, Sunak declared that many tax allowances and bands would remain frozen until 2026. In light of rising inflation and wages, this decision may, in fact, provide more tax for the government than previously expected. In March 2021, the Office for Budget Responsibility (OBR) surmised that the personal allowance and higher-rate tax threshold freezes would supply £8.2bn a year by 2025/26. Last week, the Institute for Fiscal Studies (IFS) calculated that, based on the most recent forecasts, that figure could amount to as much as £21bn a year.
Meanwhile in Ukraine, the crisis continued to play out. Some worry that the tragedy may trigger a global recession. Felipe Villarroel, Fund Manager at TwentyFour Asset Management, believes, however, that these fears could be overblown:
“Under the assumption that this conflict does not escalate into a direct confrontation between Russia and NATO, and that peace is eventually achieved (with commodity prices returning to some sort of normality even if this is higher than pre-war), we do not believe the world is headed for recession.”
Broadly speaking, the S&P 500 continued its recent recovery – rising 1.8% over the course of the week. In Europe, the MSCI Europe ex. UK index dropped by -1.0%, due to the war in Ukraine continuing to weigh heavily on investor sentiment.