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“We now need stability and unity”

In another whirlwind week in UK politics, Liz Truss resigned last Thursday, the shortest serving Prime Minister in British history. Speaking outside Downing Street she said she could not deliver the mandate on which she was elected. Her resignation after just 44 days kickstarted a contest to find the next Conservative leader and PM.

A fast-tracked leadership contest saw the benchmark set high, with hopefuls needing to receive the backing of 100 MPs by 2pm on Monday. Sir Graham Brady, 1922 Committee Chair commented on the urgent need for stability, “We’re deeply conscious of the imperative of the national interest of resolving this clearly and quickly.”

Boris Johnson, Penny Mordaunt and Rishi Sunak threw their hats in the ring. Johnson pulled out of the race on Sunday, and with Mordaunt seemingly unable to get the backing of 100 MPs, Mr Sunak was named the next Prime Minister, the UK’s first British Asian PM and the youngest leader in over two centuries.

In a brief address on Monday afternoon, Mr Sunak warned the country faced “profound economic challenges” adding, “We now need stability and unity, and I will make it my upmost priority to bring our party and our country together because that is the only way we will overcome the challenges we face and build a better more prosperous future…I pledge that I will serve you with integrity and humility and I will work day in day out to deliver for the British people.”

After meeting King Charles, Mr Sunak gave a speech outside Number 10, saying that he would restore trust, rebuild confidence and lead the UK through “a profound economic crisis” before he set to work on appointing his cabinet.

Dominic Raab has been confirmed as Deputy PM, Grant Shapps was appointed business secretary and Jeremy Hunt remains as Chancellor.

Inflation continues its ascent

According to the most recent data from the Office for National Statistics (ONS), food and non-alcoholic beverage prices in the UK are increasing at their fastest pace in over forty years, since April 1980. In the 12 months to September, food costs leapt by 14.6%, up from 13.1% in the 12 months to August. Key drivers to the rise were price increases in meat, cereal, bread and dairy products.

As food price rises continue their ascent and people struggle with the cost of key household staples, Karen Betts, Chief Executive of the Food and Drink Federation commented on the rise, “Food and drink manufacturers continue to do everything they can to keep product prices down, but huge rises in ingredient, raw material, energy and other costs mean they have no choice but to pass some price rises on.”

She continued, “Recent economic turbulence in the UK has made a difficult operating environment for businesses in our sector worse.  Companies urgently need a stable economic outlook and a coherent policy framework to enable them to make investment and other critical decisions that are central to their businesses and to the prosperity of their local communities.”

IHT receipts

The latest Inheritance Tax (IHT) figures released last week have intensified the debate over government intentions. Total HM Revenue and Customs (HMRC) receipts for April 2022 to September 2022 were £3.5bn, which is £0.4bn higher than in the same period last year. Government IHT receipts were bolstered by £557m taken during September, and high receipts in June were attributed to a ‘small number of higher-value payments than usual.’

Markets

The markets reacted positively to the departure of Liz Truss, with European stocks closing higher on Thursday. On the same day, in the UK, the FTSE 100 closed up 0.3% and sterling rose 0.7% to reach $1.13 against the dollar. On Tuesday, following Mr Sunak’s first speech, the pound hit its highest level against the dollar since 15 September at $1.14. The FTSE 100 ended the session down 0.07% to close on 7,013.48 and the FTSE 250 was up 2.85% to close on 17,831.63

Here to help

Financial advice is key, so please do not hesitate to get in contact with any questions or concerns you may have.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

All details are correct at time of writing (26 October 2022)

“We need to act now to reassure the markets of our fiscal discipline”

Last Friday, in response to the mounting political crisis over his tax-cutting Growth Plan, Kwasi Kwarteng arrived back earlier than scheduled from the International Monetary Fund (IMF) conference in Washington, and headed straight to Downing Steet, where the Prime Minister sacked him from the role after just 38 days.

Jeremy Hunt, former Foreign Secretary and Health Secretary, who also competed for the Conservative party leadership twice, was named as the new Chancellor. Hunt will now deliver the Medium-Term Fiscal Plan on 31 October, alongside the Office for Budget Responsibility (OBR) forecast.

Rounding off another challenging week for the UK economy and the government, Liz Truss held a Downing Street press conference on Friday where she announced that Corporation Tax will rise from 19% to 25% next year, another major U-turn on the tax-cutting Growth Plan, unveiled just three weeks previously. Truss admitted that her radical agenda had rattled financial markets, admitting that her borrowing-fuelled plan “went further and faster than markets were expecting,” before adding, “we need to act now to reassure the markets of our fiscal discipline.”

The government has come under intense pressure to take action to reverse aspects of the Growth Plan, in order to alleviate market concerns.

“The most important objective for our country right now is stability”

The fourth Chancellor in as many months, Mr Hunt made an emergency statement on Monday morning in a bid to stabilise financial markets, before addressing the Commons later in the afternoon. Declaring “the most important objective for our country right now is stability,” he set out his intentions to scrap almost all the tax measures set out in the Growth Plan not yet legislated for in Parliament. These include abolishing the planned reduction to the basic rate of Income Tax from 20% to 19% next April, abandoning the Dividend Tax rate changes, in addition to ditching the VAT-free shopping scheme for non-UK visitors. The government will also not be proceeding with reversal of the off-payroll working reforms introduced in 2017 and 2021, or freezing alcohol duty rates as previously pledged.

He also announced a significant amendment to the government’s energy plan, which will now only run to April 2023, with a Treasury-led review introduced to determine how to support households and businesses thereafter.

The planned reduction to Stamp Duty will proceed, as will the reversal of the 1.25 percentage point increase in National Insurance contributions.

Saying he remains confident about the UK’s long-term economic prospects, the new Chancellor did caution, “growth requires confidence and stability, and the United Kingdom will always pay its way. This government will therefore make whatever tough decisions are necessary to do so.”

Markets

The Prime Minister’s appearance on Friday erased any gains made following Kwarteng’s dismissal, as she failed to outline a new policy direction. However, Mr Hunt’s reversal of most of the mini-budget’s tax cuts and announcement of spending cuts to come, saw market confidence improve with the FTSE 100 ending Tuesday’s session up 0.24% at 6,936.74, and the FTSE 250 ahead by 0.15% at 17,529.31.

Mortgages rates at a high

Average mortgage interest rates are the highest they have been since the 2008 financial crisis, with the average rate for a two-year fixed rate loan at 6.53% and 6.36% for a five-year fixed deal, according to Moneyfacts.

Countering the Cost-of-Living Crisis

In its latestWorld Economic Outlook entitled ‘Countering the Cost-of-Living Crisis’, released last week, the IMF cautioned that the combined impacts ofinflation, the war-induced food and energy crises, and dramatically higher interest rates were threatening financial market stability and driving the world to the brink of recession. With the cost-of-living crisis ‘tightening financial conditions in most regions’, the outlook deduced that global economic activity is ‘experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades.’  With global inflation forecast to increase from 4.7% last year to 8.8% this year, declining to 6.5% next year, the outlook suggests that in order to restore price stability, monetary policy should stay the course and fiscal policy should aim ‘to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance.’

Here to help

Financial advice is key, so please do not hesitate to get in contact with any questions or concerns you may have.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

All details are correct at time of writing (19 October 2022)

“We are experiencing a fundamental shift in the global economy”

Last week, International Monetary Fund (IMF) Managing Director Kristalina Georgieva delivered a speech in Washington DC entitled ‘Navigating a more fragile world.’ She referred to the combined impact of a trio of challenges – recovery from the pandemic, the Ukraine invasion and climate issues – which have driven a global price surge and referred to how geopolitical fragmentation has made dealing with them even more challenging.

She professed, “We are experiencing a fundamental shift in the global economy, from a world of relative predictability, with a rules-based framework for international economic cooperation, low interest rates, and low inflation… to a world with more fragility – greater uncertainty, higher economic volatility, geopolitical confrontations, and more frequent and devastating natural disasters – a world in which any country can be thrown off course more easily and more often.”

She spoke about an urgent ongoing need to continue efforts to stabilise the global economy, through monetary policy tightening to bring down inflation, deploying targeted fiscal measures to help the vulnerable, and supporting emerging market economies. In their just-released World Economic Outlook the IMF has forecast that global growth will slow to 3.2% in 2022 and 2.7% in 2023.

UK food retail sector

The latest financial results from Tesco show that changing consumer habits are intensifying the high street battle for shoppers keen to save money. Consumers are continuing a newly established trend to buy more own brand goods, buy less in their weekly shop and being prepared to shop around to get more with their weekly budget.

According to Ken Murphy, Tesco Chief Executive Officer, customers are trying to “make their money go further, whether they are switching from branded products, between categories or cutting back on eating out.” The increasing move toward value for money has seen Lidl becoming the fastest growing UK supermarket, with Aldi leapfrogging Morrisons to become the fourth largest.

Mortgage rates climb

As the mortgage market continues to deal with the fallout from the Growth Plan and rate rises, news came last week that the average five-year mortgage rate has nearly reached a 12-year high, with the typical deal now topping 6%. The last time this average figure breached 6% was in January 2010. The average two-year fixed rate, which stood at 4.74% at the beginning of October has also risen to over 6%, its highest since November 2008, during the onset of the financial crisis. Wind the clock back one year to October 2021, the average two- and five-year rates were 2.25% and 2.55% respectively.

Chancellor Kwasi Kwarteng met with major UK lenders, including Barclays and Natwest last week, for discussions which included recent developments in the mortgage market. In a statement following the meeting, the Treasury outlined, ‘While it is the responsibility of the sector to provide the best value for mortgage rates, the Chancellor confirmed that the Treasury would continue to work closely with the sector in the weeks and months ahead.’

The Chancellor has been asked by lenders to extend the government’s mortgage guarantee scheme due to expire at the end of 2022, which offers government underwriting for 5% deposit mortgages.

Medium-Term Fiscal Plan

Mr Kwarteng has brought forward the date for his Medium-Term Fiscal Plan from 23 November to 31 October. Nearly a month before the original date, he will outline his plan for balancing the government’s finances, laying out more detail on how he intends to pay for £43bn of tax cuts, in addition to plans to reduce debt. An independent economic forecast from the Office for Budget Responsibility (OBR) will be published at the same time.

Unemployment falls

New data from the Office for National Statistics (ONS) has highlighted that the unemployment rate has unexpectedly fallen to its lowest level since the three-month period to February 1974. In the three months to August, the jobless rate reduced by 0.3 percentage points to 3.5%.

Markets

The Bank of England intervened twice this week to increase the scale of its emergency bond-buying programme and announced that it would widen its scope to include index-linked bonds which are linked to inflation.  London stocks closed down on Tuesday with the FTSE 100 ending the session down 1.06% at 6,885.23, and the FTSE 250 closed down 1.29% at 16,904.06.

Here to help

Financial advice is key, so please do not hesitate to get in contact with any questions or concerns you may have.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

All details are correct at time of writing (12 October 2022)

“We live in rapidly moving times”

The Prime Minister and Chancellor met with the Office for Budget Responsibility (OBR) on Friday morning to discuss the ramifications of their Growth Plan. In a move widely seen as an attempt to reassure financial markets following a challenging week, the Bank of England stepped in with a £65m intervention to carry out a temporary purchase of long-dated UK government bonds.

The government and OBR agreed to work closely together, with the OBR confirming it will deliver the first draft of its economic and fiscal forecasts on 7 October. The Chancellor has commissioned the OBR to publish an updated forecast alongside his Medium-Term Fiscal Plan, which is expected to take place on 23 November.

Speaking on Thursday, Huw Pill, member of the Monetary Policy Committee (MPC) and Bank of England Chief Economist, delivered a speech about recent developments in the economy and markets. Speaking about current events, he deduced, “We live in rapidly moving times. As events unfold, assessments need to be updated. But, at present, on the basis of the fiscal easing announced last week, the macroeconomic policy environment looks set to rebalance.” On the impact of market developments he summarised, “It is hard to avoid the conclusion that the fiscal easing announced last week will prompt a significant and necessary monetary policy response in November.” The MPC is next scheduled to meet on 3 November.

U-turn – Chancellor tax reversal

As part of the Growth Plan, the Chancellor had pledged to abolish the 45p additional rate of tax, from April 2023, which is paid by people who earn more than £150,000 a year. On Monday, after widespread opposition to the move, including from several senior Conservative MPs, the government announced a U-turn to this policy, with Chancellor Kwasi Kwarteng saying, “it is clear that the abolition of the 45p tax rate has become a distraction.”

Economic growth confirmed in Q2

On Friday, positive data released by the Office for National Statistics (ONS) showed that UK economic output increased by 0.2% in the second quarter of the year, revised up from a previous reading of -0.1%, suggesting the UK is not currently in recession – defined as two consecutive three-month periods of GDP contraction. In September, the Bank of England had cautioned that the UK could already be in recession, so the official data was welcomed. ONS Chief Economist Grant Fitzner said the revised figures also show that “while household savings fell back in the most recent quarter, households saved more than we previously estimated during and after the pandemic.”

Mortgages withdrawn

It has been reported that since the Chancellor’s ‘mini-Budget’ on 23 September, over 40% ofavailable mortgages have been withdrawn from the market, amid concerns that the BoE would call for a large emergency rate rise and expectations that Bank Rate could reach 6% by summer 2023. Lenders started suspending products last week as it became increasingly challenging to price them amid the uncertainty of financial markets. Lenders are having to deal with fast moving funding conditions and have withdrawn or repriced products altogether or streamlined down their mortgage range. 

Energy price cap in action

From 1 October, the government’s Energy Price Guarantee now applies, limiting the price households pay per unit of gas and electricity. The average unit price for dual fuel customers paying by direct debit is limited to 34.0p per kilowatt hour (kWh) for electricity and 10.3p per kWh for gas.

Markets

Sterling managed a rebound, edging back up to the levels seen before the Chancellor unveiled his Growth Plan. London stocks appear to have reacted positively to the 45p tax rate U-turn, with the FTSE 100 ending Tuesday’s session up 2.57% at 7,086.46, and the FTSE 250 ahead 3.11% at 17,822.15.

Coining it in…

The Royal Mint has unveiled the official coin effigy of King Charles III. Special £5 and 50p coins commemorating Elizabeth II were released on Monday, with the 50p set to enter general circulation from December. Currency featuring the late Queen will remain legal tender.

Here to help

Financial advice is key, so please do not hesitate to get in contact with any questions or concerns you may have.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

All details are correct at time of writing (5 October 2022)