6 September 2022
Liz’s to-do list
As voted by 0.29% of the population, Liz Truss succeeds Boris Johnson as the Conservative Party leader, and will be the UK’s next prime minister.
Following a brief visit to Balmoral today, she will then need to address the unenviable list of challenges facing her.
Whether or not Conservative Party members are illustrative of the general population is debatable. Yet one point they do agree on is that the new prime minister should prioritise the cost-of-living crisis. According to Ipsos research in July, this was top of the list of issues for 43% of Conservative members in a recent survey, with 40% of Britons naming it as their main concern.
And rightly so. Last week, Goldman Sachs warned that inflation in Britain could hit 22% in 2023 if energy costs continue to escalate – for context, the Bank of England expects a 13.3% peak this October. Goldman Sachs went on to say that it does not anticipate the recent upsurge in European gas prices to continue, and yet even if energy costs were to temper, it predicts that inflation will peak at 14.8% in January.
Analysis by Carbon Brief foresees that UK households will spend 10% of their income on vehicle fuel, gas and electricity this winter – double what they spent in 2021 – making the current energy crisis worse than those in the 1970s and 1980s. However, new habits are already underway, as shown in a study by the Financial Fairness Trust, which states that a third of households have cut down on the number of showers they take, while the same proportion have reduced their cooker and oven use.
Additional proof of the inflationary challenges was revealed via the British Retail Consortium’s data released last week, showing that consumers are paying unparalleled prices in shops. Prices rose by 5.1% in the 12 months to August – the largest increase since records began in 2005.
The benchmark FTSE 100 index closed the month down almost 2%, while recession and inflation fears hit the domestically focused FTSE 250 harder, as it dropped 5%. Sterling lost nearly 5% against the dollar in August – the most since the Brexit vote back in 2016.
Capital Economics predicts that sterling could dip to $1.05 in the months ahead – its lowest level since 1985, based on its forecast that the energy crisis will thrust both the UK and eurozone into a recession, with the US getting away with a more moderate slowdown.
The energy squeeze intensified in Europe last week, when Russia turned off gas supplies to Germany, its top customer, via the key Nord Stream 1 pipeline. First stating the need for three days of maintenance, the state energy firm Gazprom then went on to declare that an oil leak would see it close indefinitely. This came about soon after the G7 nations agreed to cap the price of Russian oil in support of Ukraine.
According to EU Council President Charles Michel, Russia’s move was “sadly no surprise”.
“Use of gas as a weapon will not change the resolve of the EU to accelerate our path towards energy independence. Our duty is to protect our citizens and support the freedom of Ukraine.”
US stocks suffer
The end of the month was no smooth ride for US stocks, as investors weighed the Federal Reserve’s inflation-fighting efforts. Having reached a four-month high mid-month, the S&P 500 index then fell on four consecutive days to register its poorest August performance in seven years.
Loretta Mester – Cleveland Fed President – remarked that she anticipated benchmark interest rates will go above 4% early next year and stay there throughout 2023. This further dampened investors’ hopes that the US central bank would put the brakes on its rate hiking plan in the face of a recessionary environment.
Friday brought news that US non-farm payrolls rose by 315,000 in August, following an increase of 528,000 in July. The report further fortified expectations that the Fed will continue with its outsize interest rate increases. Next week’s CPI inflation news is unlikely to change that.
US investment managers Payden & Rygel observed:
“Financial markets have enjoyed a summer reprieve, with many investors hoping that the Fed has already done most of the work to rein in price pressures. But, unfortunately, that hope may have been premature. The stop-start inflation-fighting debacle of the 1970s didn’t end well for the economy or the markets. This time the Fed is unlikely to stop (ease policy) until the inflation dragon has been slayed. Not allayed, but slayed.”