31 May 2022
Last week, Chancellor Rishi Sunak declared a £15 billion support package to help the population handle growing fuel costs, following weeks of increasing political pressure.
Many households are up against mounting gas and electricity bills, which will likely soar once more in October, as the annual price cap is set to go up by a further £800. Sunak announced a £400 energy grant for all UK households to help with these cost increases, alongside additional grants for those with means-tested disability benefits, pensioners and low-income households.
In part, the move will be funded by a windfall tax on the profits made by gas and oil companies. Yet additional borrowing will cover much of the rest.
David Page, Head of Macroeconomic Research at AXA Investment Managers, commented that the package was more targeted and larger than anticipated, and would serve as a buffer against growing energy costs.
He went on to say, however:
“Assuming that today’s package will be largely debt financed, this amounts to additional fiscal stimulus, something that is likely to maintain growth in excess of trend in Q3 this year. As such, we think that this will lead the Bank of England to tighten monetary policy further to ensure that inflation falls back sufficiently over the coming years.”
Paul Dales, Chief UK Economist at Capital Economics, put forward four key outcomes as a result of the package:
- Household income won’t drop as far this year as had been expected – however, it will still fall.
- GDP growth will be approximately 0.3% higher than previously forecasted.
- Inflationary pressures will increase. Capital Economics raised its 2023 inflation targets from 4.3% to 4.8%, with half of this increase being a direct consequence of these measures.
- Increasing inflation will mean the Bank of England will need to do more to meet its 2% inflation target. It will therefore likely increase interest rates to a greater extent.
In the US, meanwhile, the S&P 500 went up by over 6.5% last week – boosted by solid retail sales data. April saw purchases rise by 0.9%, while the March data was also revised higher. Wage growth remains below the rate of inflation, but the surge in activity can be ascribed to households spending savings they accrued during the pandemic. While unsustainable over the long term, the recent strength in consumer spending indicates that US economic growth is above 3.0% in the quarter – reversing the contraction of Q1.
Eoin Walsh, Partner, Portfolio Management at TwentyFourAM, said this spending trend mirrored recent comments from US banks. He observed:
“We think that the large US banks probably have the best insight into the health of the US consumer, as they service all cohorts of the population and all sectors. Therefore, comments from Bank of America (BoA) CEO Brian Moynihan stating that BoA’s customers are yet to spend significant stimulus money, possess higher deposits than a year ago and are spending more, support the view that the US economy remains relatively healthy.
“These comments followed the JP Morgan CEO, Jamie Dimon, saying that the US economy remained strong and “credit looks really good”. The sources of these comments are well-regarded and mean investors have reason to reconsider the growing view that the US economy was heading for a hard landing.”
Weak Chinese equities
This can be contrasted with developing markets, which for many reasons have been in difficulty recently – one being the continued weakness of Chinese equities. Over the past year, these have struggled with tightening regulations in some sectors, issues with property developers (most notably Evergrande), and, most recently, due to renewed COVID-19 concerns. The latter of these points has seen Shanghai implement a strict lockdown for some time now.
There are, however, a number of individuals who propose that pessimism around China could be peaking. Tom Wilson, Head of Emerging Market Equities at Schroders, affirms:
“Unlike many other countries, policy stimulus is being applied and if the zero-COVID-19 policy leads to fewer restrictions, the economy could rebound from a low base. Emerging market investors are underweight China, according to industry surveys, and the equity market has cheapened.”