News in Review

‘The economy has recently been subject to a succession of very large shocks’

Last Thursday, as highly anticipated, the Bank of England (BoE) announced the third increase in Bank Rate in four months, placing more pressure on household finances. The Monetary Policy Committee (MPC) members voted by an eight to one majority in favour of the 0.25 percentage point rise from 0.5% to 0.75%, in a bid to dampen soaring inflation.

Bank Rate is now at its highest level since March 2020, at the start of the pandemic. The policymakers felt that the rate rise was justified ‘given the current tightness of the labour market, continuing signs of robust domestic cost and price pressures, and the risk that those pressures will persist.’

The Committee said that depending on how medium-term prospects evolve, including the economic implications of geopolitical events, ‘some further modest tightening in monetary policy may be appropriate in the coming months.’ The next MPC meeting will take place in early May.

The Bank cautioned that the annual inflation rate may rise to around 8% in Q2 and potentially even higher later in the year, possibly reaching double digits if energy prices push up the energy price cap when it’s reset in October. Prices have already increased by 6.2% in the year to February, a new 30- year high and well above the BoE’s 2% inflation target. The Bank outlined that the Ukraine invasion has exacerbated supply chain disruption, placed upward pressure on energy, commodity and food prices, and has significantly increased uncertainty around the economic outlook, commenting, ‘The economy has recently been subject to a succession of very large shocks. Russia’s invasion of Ukraine is another such shock… should recent movements prove persistent, the very elevated levels of global energy and tradable goods prices, of which the United Kingdom is a net importer, will necessarily weigh further on UK real aggregate income and spending. This is something monetary policy is unable to prevent.’

The cost of doing business

Set against a backdrop of growing domestic and global headwinds, Head of Economics at the British Chambers of Commerce (BCC) Suren Thiru, said that although expected, the decision to raise interest rates was mistimed, arguing that higher rates will do little to curb some of the global causes behind the surge in prices and risk intensifying the financial squeeze on consumers and businesses, “While interest rates remain low by historic standards, the latest rise will be viewed by many as a further step in a prolonged period of aggressive monetary tightening at a time when consumers and businesses are struggling under a myriad of rising cost pressures… intensifying the headwinds facing the UK economy by damaging confidence and deepening the financial squeeze on consumers and businesses.” He urged the Chancellor to take the opportunity to use the Spring Forecast Statement on 23 March to address the “escalating cost of doing business crisis” and suggested that a delay in the National Insurance rise and introducing a temporary energy price cap for small businesses, would be enough to provide firms with the “headroom to keep a lid on prices, protect jobs and make investment that is so vital to sustaining our economic prospects.”

The Chancellor has pledged to help “where we can make a difference” as he faces pressure to assist struggling households. There have been reports that this could include a temporary cut in fuel duty.

Markets

Toward the end of last week, both US and European markets continued their recovery, delivering solid weekly advances, as investors positively regarded the certainty of the Federal Reserve’s monetary policy announcement on Wednesday. The Fed adopted a measured approach, raising interest rates 25 basis points and plotted out a route toward six additional rate hikes during 2022. This is the first time the US central bank has raised the interest rates since 2018.

On Tuesday, the price of Brent Crude reached over $118 a barrel as concerns persist over potential shortfalls in supplies. London stocks finished in positive territory following news from the Office for National Statistics (ONS) that government borrowing in February was £13.1bn, a drop of £2.4bn from February 2021.

Here to help

It is essential that investors focus on longer-term timescales instead of focusing too intently on short-term volatility. Rest assured we will continue to monitor events closely. 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.

News in Review

“At the Spring Statement, Rishi Sunak has to make a huge judgment call”

With a week to go until the next fiscal event in the government’s calendar – the Spring Forecast Statement on 23 March – new research from the Institute for Fiscal Studies (IFS) has highlighted its belief that the Chancellor has some big decisions to make in the face of soaring living costs and new economic challenges presented by the war in Ukraine.

Interestingly, a Spring Statement is usually regarded as a lesser fiscal event than a Budget; providing a set of new economic forecasts and updates, rather than the government’s planned spending and revenue gathering proposals which appear in the Budget. However, on this occasion, with inflation continuing its ascent, wages unable to keep pace, and the costs of energy, fuel and other commodities being driven even higher due to the invasion of Ukraine, the IFS is speculating whether the government will consider extra protection for households struggling to keep up with their bills, potentially making this a crucial event for many households.

The IFS analysis emphasises ‘the far-reaching economic challenges associated with this shifting outlook. Households and public services will be squeezed by higher inflation, the economy rocked by heightened uncertainty, and the public finances buffeted by the fallout from Ukraine.’ Paul Johnson IFS Director added, “At the Spring Statement, Rishi Sunak has to make a huge judgment call. Will he do more to protect households from the effects of energy prices, which have risen even further in the last two weeks? If he doesn’t, then many on moderate incomes will face the biggest hit to their living standards since at least the financial crisis. If he does, then there will be another big hit to the public finances.”

“Significant economic uncertainty”

Although the UK economy rebounded strongly in January, analysts’ expectations indicate more subdued growth moving through 2022 as the cost-of-living crisis intensifies. Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC) believes the Ukraine invasion “has increased the risk of a recession in the UK” by exacerbating the inflationary squeeze and “derailing the supply of critical commodities to many sectors of the economy.” Chancellor Rishi Sunak said that Russia’s invasion “is creating significant economic uncertainty.” He added that the government’s “unprecedented support” provided during the pandemic “has put our economy in a strong position to deal with current cost of living challenges.”

Further emergency funding

In addition to funding provided by the World Bank, the International Monetary Fund (IMF) last week approved $1.4bn of emergency funding for Ukraine, to meet the country’s urgent spending needs and help alleviate the devastating economic impact of the war. Kristalina Georgieva, Managing Director of the IMF said, “The Russian military invasion of Ukraine has been responsible for a massive humanitarian and economic crisis… The tragic loss of life, huge refugee flows, and immense destruction of infrastructure and productive capacity is causing severe human suffering and will lead to a deep recession this year. Financing needs are large, urgent, and could rise significantly as the war continues.”

G7 Leaders showed support for the people of Ukraine and condemnation of Putin’s war by issuing a joint statement, ‘We are united in our determination to hold President Putin and his regime accountable for this unjustified and unprovoked war that has already isolated Russia in the world. The world should join together in calling on President Putin and his regime to immediately stop its ongoing assault against Ukraine and withdraw its military forces. We stand in solidarity with those who are bravely opposing the invasion of Ukraine.’

Markets

At the end of last week, many European markets responded positively on tentative hopes that discussions between Ukraine and Russia were progressing, however US indices were more subdued, following the release of February’s inflation figure which reached a 40-year high of 7.9%.

London stocks dropped into the red on Tuesday as Office for National Statistics (ONS) data revealed that real wages in the UK, taking inflation into account, had dropped by 1% in the three months to January, the biggest fall since 2014.

Here to help

It is essential that investors focus on longer-term timescales instead of focusing too intently on short-term volatility. Rest assured we will continue to monitor events closely. 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.

Preserving your retirement from the risk of mental decline

Many of us can now look forward to a longer retirement, due to increased life expectancy, however this unfortunately comes at a cost. The prevalence of age-related cognitive decline is on the rise, which could leave us vulnerable to costly financial errors.

There are nearly 885,000 people living with dementia in the UK1, with estimates suggesting that between 5% and 20% of over-65s suffer from mild cognitive impairment (MCI). This is a condition in which someone has minor problems with cognition, such as thought process and memory.

Planning for every eventuality

An essential element of preparing for your retirement should involve planning for the possibility of cognitive decline. Despite many people still having the capacity to make decisions and live independently, MCI has been linked in studies to poorer financial capacity and a greater susceptibility to scams.

It’s all about timing

In a recent survey2, over 80% of investors felt the ideal time to transfer financial control would be ‘sometime after they had begun to experience some cognitive decline but before they became completely incapable.’ Respondents thought there was a higher than one-in-three chance of a mistimed transfer, partly attributable to a reluctance to relinquish control, which highlights the need to plan sooner rather than later, so that any future transfer takes place on your terms.

Make time to talk

Preparing for the possibility of cognitive decline requires careful planning, not only having legal documents in place but also starting conversations with your family and those you trust about your finances and objectives, in advance of its possible onset. This fosters transparency and, with everything out in the open, close connections are more likely to notice if you begin making decisions about your money that don’t align with your objectives.

We can assist you with planning and in starting these conversations well in advance, enabling you to better plan for the future, giving you a greater sense of control and ownership of your plans.

1Alzheimers Society, 2019

2Vanguard, 2021

The value of investments and income from them may go down. You may not get back the original amount invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

News in Review

‘The situation remains highly fluid and the outlook is subject to extraordinary uncertainty’

Last week, as the invasion of Ukraine entered a second week, the President of the World Bank declared the situation “a catastrophe” for the world. Although David Malpass stressed his biggest concern is “about the pure human loss of lives” he also highlighted the economic impact of the war, which, although devastating for Ukraine, also stretches beyond the invaded country’s borders. The Bank has approved $723m in grants and loans for Ukraine.

On Saturday, the International Monetary Fund (IMF) issued a statement on the economic impact of the war, which highlighted that the already ‘serious’ global economic impacts would be ‘all the more devastating’ should the conflict escalate.

The statement outlined, ‘The war in Ukraine is resulting in tragic loss of life and human suffering, as well as causing massive damage to Ukraine’s physical infrastructure… Unprecedented sanctions have been announced on Russia. While the situation remains highly fluid and the outlook is subject to extraordinary uncertainty, the economic consequences are already very serious. Energy and commodity prices – including wheat and other grains – have surged, adding to inflationary pressures from supply chain disruptions and the rebound from the COVID‑19 pandemic. Price shocks will have an impact worldwide, especially on poor households for whom food and fuel are a higher proportion of expenses. Should the conflict escalate, the economic damage would be all the more devastating. The sanctions on Russia will also have a substantial impact on the global economy and financial markets, with significant spill overs to other countries.’

Boris Johnson met with Canadian Prime Minister Trudeau and Dutch Prime Minister Mark Rutte on Monday, kicking off a week of engagements with global leaders, to ‘mobilise the outcry at the atrocities of Russian aggression into support for Ukraine.’

On Tuesday, the House of Commons was packed for an unprecedented address to MPs by President Zelensky. He referenced Winston Churchill’s famous speech, saying “We will not give up and we will not lose … we will fight in the forests, in the fields, on the shores, in the streets.”

Also on Tuesday, Business Secretary Kwasi Kwarteng announced that the UK will phase out the import of Russian oil over the course of the year. This followed President Biden’s announcement of a ban on Russian oil and gas imports after “close consultation with our allies, especially in Europe.”

UK growth estimates moderate

Last week, the British Chambers of Commerce (BCC) downgraded its expectations for GDP growth in the UK this year from a previous estimate of 4.2% to 3.6%. This downgrade is reflective of a weaker rebound in business investment and a deteriorating outlook for consumer spending. It is projected that inflation will outpace wage growth until Q2 2024. 

Head of Economics at the BCC Suren Thiru commented on the forecast, “Our latest forecast signals a significant deterioration in UK’s economic outlook. The UK economy is forecast to run out of steam in the coming months as the suffocating effect of rising inflation, supply chain disruption and higher taxes weaken key drivers of UK output, including consumer spending and business investment.”

Growing list of firms withdraw from Russia

More global anti-war protests took place on Saturday in solidarity with the Ukrainian people, in cities including London, Hamburg and Paris. Following previous announcements from global giants including BP, which hived off its stake in Russian energy giant Rosneft, plus pledges from Shell, ExxonMobil and Equinor to cut their Russian investments, the flood of announcements from firms stepping back from Russia continues. The most recent firms pausing activities in Russia include Apple, Jaguar Land Rover, H&M, PayPal, Prada, Mastercard, Visa, McDonalds and Coca-Cola.

Markets

Global markets have continued to count losses in the wake of the invasion. Many stocks entered the red at the end of last week following reports of a Russian attack on a nuclear power station in Ukraine, heightening investor fears about the escalating conflict and sending oil prices higher. Oil prices spiked to their highest levels in over a decade, with the price of Brent crude reaching $139 per barrel, while the price of gold broke through $2,000 an ounce on Monday as London’s market suspended the sale of Russian bars.

Here to help

It is essential that investors focus on longer-term timescales instead of focusing too intently on short-term volatility. Rest assured we will continue to monitor events closely. 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.

Long-term renters miss out

In today’s market, getting a foot on the housing ladder is no easy task, but new research highlights just how rewarding home ownership can be.

Research from the Equity Release Council (ERC)1 has found that someone buying a house today could save £326,214 in the next 30 years compared with people who rent throughout the same period – before house price growth is even factored into the equation!

Financial security

Working to build up the funds for a deposit, although difficult, is well worth the effort. Over two-thirds of homeowners say they feel confident about their financial future, higher than the 45% of renters who feel the same. Yet, more than half of people who are not yet homeowners believe it is “unrealistic” to think they ever will be.

Confidence and flexibility

Homeownership, the research concludes, is becoming ever more critical to financial wellbeing and being able to achieve one’s long-term financial goals.

Chair of the ERC, David Burrowes, said, “People today are living and working longer with responsibility to fund their later years and will need to think differently about their financial decisions at different life stages. For people who manage to buy their own home during their working lives, the extra confidence and flexibility this provides will be even more critical to their financial wellbeing than it is today.”

A foot on the ladder

When you’re looking to get onto the property ladder, sound advice improves your chances of success. To make your first steps towards homeownership, get in touch.

1Equity Release Council, 2021

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments. Equity release may require a lifetime mortgage or a home reversion plan. To understand the features and risks, ask for a personalised illustration.

The ‘Late Financial Bloomer’ faces a complex retirement journey

A new group of consumers, dubbed the ‘Late Financial Bloomers’ are set to change the face of retirement1. An array of socioeconomic factors, such as later home ownership, are the primary drivers behind this shift.

Divorce and marriage trends are also key contributors, as is later childbirth. First marriages now take place four years later than they did 20 years ago; similarly, divorce rates peak 20 years later than they did two decades previously. With more women over 40 now giving birth each year than those under 20, a growing proportion of the population will be supporting children through education later in life, diverting attention from retirement planning.

Currently, accounting for just 6% of retirees, the number of Late Financial Bloomers is set to rise considerably over the next 15 years or so. The trend towards later financial security means an increasing number of people will face complex retirement journeys, highlighting the requirement to plan ahead.

1Canada Life, 2021

The value of investments and income from them may go down. You may not get back the original amount invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

News in Review

“The UK is announcing the largest and most severe package of economic sanctions that Russia has ever seen” ‘Freedom Day’ in England was overshadowed last Thursday as Russian President Vladimir Putin ordered the invasion of Ukraine, with troops attacking the country from the north, south and east. The European Union hailed the invasion as one of the darkest hours for Europe since World War II, warning Russia will be hit with ‘massive sanctions.’ Major Western nations have reacted with outrage, with many world leaders condemning Russian actions. Ukrainian forces and civilians continue to vehemently defend their country. Defiant Ukrainian President Volodymyr Zelensky has vowed to stay in Kyiv as his troops battle Russian military, citing, “We are all here. We are defending our independence, our country.” According to the United Nations, more than 600,000 civilians have now fled Ukraine. As the tragic humanitarian cost unfolds, the invasion will clearly have significant global economic, geopolitical and investment implications. On 24 February, Boris Johnson gave a statement to the House of Commons, declaring, “Now we have a clear mission: diplomatically, politically, economically – and eventually, militarily – this hideous and barbaric venture of Vladimir Putin must end in failure. At the G7 meeting this afternoon, we agreed to work in unity to maximise the economic price that Putin will pay for his aggression, and this must include ending Europe’s collective dependence on Russian oil and gas that has served to empower Putin for too long… For our part, today the UK is announcing the largest and most severe package of economic sanctions that Russia has ever seen.” UK sanctions announced by the Prime Minister include:
  • All major Russian banks will have their assets frozen and be excluded from the UK financial system, inhibiting them from accessing sterling and clearing payments through the UK
  • Russian companies and the state will be prevented from borrowing money or raising finance on UK markets
  • A suspension of dual-use export licences to cover components which can be used for military purposes and ceasing exports of high-tech items and oil refinery equipment.
In a move designed to cut off Moscow’s major financial institutions from Western markets, the UK government has joined with the US and the EU to announce sanctions against Russia’s central bank, banning British people and businesses from making transactions with the Russian central bank, its finance ministry and its wealth fund. Rishi Sunak said the sanctions “demonstrate our steadfast resolve in imposing the highest costs on Russia and to cut her off from the international financial system so long as this conflict persists.” Unprecedented measures In addition to sanctions imposed by other nations, the EU intends to purchase and ship arms to Ukraine, the first time it has taken such a step. European Commission President Ursula von der Leyen announced a raft of sanctions on Sunday, including banning all Russian aircraft from using European airspace, including the private jets of Russian oligarchs. In a significant step, selected Russian banks have been removed from the Swift messaging system, to cut them off from the international financial system and harm their ability to operate globally. Other developments On Sunday, Vladimir Putin moved Russia’s nuclear deterrent to special alert, a move the US have condemned as “unacceptable.” A Ukrainian delegation met with Russians on the Belarus border for ceasefire talks on Monday; although no breakthrough was reached, further negotiations are expected. Speaking during a visit to Poland on Tuesday, Boris Johnson said he was “increasingly confident” that Russia’s invasion would not succeed, adding that Mr Putin “must fail” in Ukraine. Later in the day, Foreign Secretary Liz Truss launched a first tranche of sanctions on Belarus for its role in the invasion. Markets Global markets have reacted predictably with many stocks moving into the red and the oil price pushing beyond the $100 milestone. Investors are pensively monitoring Russian attacks on Ukraine and the impact of sanctions imposed by the West. Here to help It is essential that investors focus on longer-term timescales instead of focusing too intently on short-term volatility. Rest assured we will continue to monitor events and their impacts closely. 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.

The top beauty spots for UK buyers

New research1 has revealed the UK’s top ten most sought-after beauty spots from the 46 areas of outstanding natural beauty across England, Wales and Northern Ireland and 40 national scenic areas across Scotland.

Country living

The Cotswolds leads the way, with houses in this area notching up over 8.5 million views on Zoopla in 2021. Homebuyers are attracted by its acres of open countryside, charming villages and an average property price of £474,164.

In second place is the Kent Downs with 8.25 million views and an average house price of £460,132, while the Chilterns ranks third with 7.27 million views and an average price of £613,200. High Weald, Cornwall, the Gower, the North Wessex Downs, the Surrey Hills, South Devon and the Wye Valley complete the top 10.

High and low

The rankings look slightly different when price is taken into account. The Surrey Hills is the most expensive area, with the average home costing £704,813, followed by the Chilterns and High Weald (£580,537). At the other end of the scale, the Scottish Highlands’ Kyle of Tongue was the least expensive beauty spot, with homes selling for £118,302 on average.

On the move?

If you’re in search of your own slice of paradise in 2022, we can help you find the most suitable mortgage finance for you.

1Zoopla, 2021

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.

Investment terms trigger stress reaction

The common use of jargon can make investments and pensions seem impenetrable and intimidating. If the thought of words such as ‘Equities’ and ‘Investment ISAs’ gets your heart racing, you’re not alone: new research1 has shown that financial terms really can make people feel anxious.

How can this be tested?

Researchers used a variation of the Emotional Stroop Test, which measures information processing speed when naming the ink colour of different words, to compare response times for neutral words like ‘pencil’ with investment-specific terms like ‘ISA.’

Nearly two-thirds of participants had slower response times and higher error rates for financial trigger words, suggesting stress reactions. Additionally, 44.3% experienced a raised heart rate and 11.5% reported an increase in breathlessness.

The terms ‘Stockbroker’, ‘Asset Manager’ and ‘Investment Risk’ produced three of the slowest reaction times. Other investment-related words like ‘Bond Fund’ and ‘Equities’ also took longer than average.

Don’t have a fear of finance

Stripping back jargon can help people think more clearly about investments and pensions. In supporting research, Barclays found that 71% of respondents don’t feel confident enough to invest money in the stock market, with a quarter feeling ‘frightened’ by the idea.

Despite these fears, people do want to improve their financial knowledge, with three in five participants keen to learn more about financial terminology. We can relieve the stress of investments and pensions – and take the fear out of financial planning!

1Barclays, 2021

The value of investments and income from them may go down. You may not get back the original amount invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

Economic Review February 2022

Interest rates rise again

In February, the Bank of England’s Monetary Policy Committee (MPC) announced an increase in its main interest rate for the second meeting in a row as the Bank continues to grapple with a rapid rise in the cost of living.

At its latest meeting held in early February, the MPC sanctioned a quarter of a percentage point rate rise taking Bank Rate to 0.5%. In what was a surprise split decision, however, four of the nine-member committee voted for a larger hike, seeking to raise rates by half a percentage point. 

The decision to increase rates is designed to contain the country’s spiralling rate of inflation, which the Bank now expects to peak at around 7.25% in April. This would represent the fastest rate of consumer price growth since 1991 and would leave inflation significantly above the Bank’s 2% target level.

Data subsequently released by the Office for National Statistics (ONS) showed that inflation, as measured by the Consumer Prices Index, rose to 5.5% in the 12 months to January, putting the cost of living at a near 30-year high. This figure was above most predictions in a Reuters poll of economists, with the consensus suggesting the rate would hold steady at the previous month’s level of 5.4%.

The latest inflation statistics appear to have reinforced the chances of a third consecutive rate rise at the conclusion of the MPC’s next meeting on 17 March. The minutes from February’s meeting acknowledged that the Bank expects ‘further modest tightening in monetary policy’ to be appropriate ‘in the coming months’ and, according to a Reuters poll, most economists now predict a quarter percentage point rise in March. Furthermore, almost half of respondents also forecast a similar hike at May’s meeting.

Signs of economic resurgence

The latest gross domestic product (GDP) statistics show the UK economy suffered a smaller than expected economic hit in December while more recent survey evidence points to a sharp acceleration in growth during February.

Data released last month by ONS revealed that UK economic output fell by 0.2% in December as people increasingly worked from home and avoided Christmas socialising due to the spread of the Omicron variant. This contraction, however, was less severe than many had feared, with a Reuters poll of economists having predicted a 0.6% monthly fall.

Despite December’s decline, GDP data covering the whole of last year showed the UK economy experienced a sharp rebound in 2021, following the dramatic pandemic-induced collapse in output recorded during the previous year. In total, the economy grew by 7.5% across 2021, the UK’s largest annual rate of growth since 1941.

More recent survey data also suggests there has been a swift rebound in economic activity following the disruption caused by Omicron at the turn of the year. The preliminary headline reading of the closely monitored IHS Markit/CIPS composite Purchasing Managers’ Index, for instance, rose to 60.2 in February from 54.2 in January.

This represents the fastest pace of growth in private sector output since last June, with a strong recovery in consumer spending on travel, leisure and entertainment fuelling the pickup in activity. IHS Markit’s Chief Business Economist Chris Williamson said the data pointed to a “resurgent economy in February” as COVID containment measures were relaxed.

Mr Williamson did though add a note of caution, saying that “indications of a growing plight for manufacturers” needed to be watched. He added, “Given the rising cost of living, higher energy prices and increased uncertainty caused by the escalating crisis in Ukraine, downside risks to the demand outlook have risen.”

Markets (Data compiled by TOMD)

The Russian invasion of Ukraine has understandably impacted global markets. Due to the uncertain nature of the fast-evolving situation, global markets initially reacted with many stocks moving into the red and the oil price pushing beyond the $100 milestone as supply concerns intensified.

Markets reacted accordingly on the last trading day of the month following news that Vladimir Putin had placed the nuclear deterrent on high alert the previous day. A raft of economic sanctions against Russia are being imposed, including a move designed to cut off Moscow’s major financial institutions from Western markets. Chancellor Rishi Sunak said the sanctions “demonstrate our steadfast resolve in imposing the highest costs on Russia and to cut her off from the international financial system so long as this conflict persists.”

At the end of February, major global markets largely closed in negative territory as investors pensively monitored developments. In the UK, the FTSE 100 closed the month down 0.08% on 7,458.25, the FTSE 250 and AIM also both lost ground to close the month on 21,081.05 and 1,040.36, losses of 3.86% and 4.99% respectively.

In Japan, the Nikkei 225 ended the month on 26,526.82, down 1.76%, and the Euro Stoxx 50 closed February down 6.00% on 3,924.23. Stateside, the Dow Jones closed February down 3.53%, while the NASDAQ closed down 3.43%.

On the foreign exchanges, sterling closed the month at $1.34 against the US dollar. The euro closed at €1.19 against sterling and at $1.12 against the US dollar.

The oil price moderated at month end with Brent Crude closing the month trading at around $98 a barrel, a gain of over 9%. Investors flocked to gold, which is currently trading at around $1,903 a troy ounce, a gain of over 6% on the month.

Pay levels fall in real terms

While the latest set of earnings statistics did report relatively strong growth in nominal wage levels, the data also showed that pay growth is now lagging the rapidly rising cost of living.

ONS figures released last month showed that average weekly earnings, excluding bonuses, rose at an annual rate of 3.7% in the final quarter of last year. This exceeded market expectations and was also higher than Bank of England forecasts.

However, although the rate remains relatively high in comparison to levels witnessed over the last decade, pay growth is now failing to keep up with the spiralling rate of inflation. Indeed, in real terms, regular earnings fell by 0.8% compared to Q4 2020.

In early February, after announcing the latest interest rate rise, Bank of England Governor Andrew Bailey called on workers to rein in pay demands or risk a wage-inflation spiral. The tight labour market, however, means employers are increasingly having to offer higher salaries to retain existing workers and attract new staff. Early ONS estimates suggest these pressures are driving wage growth, with median earnings for workers on payrolls in January 6.3% higher than the same month last year.

Government debt costs rising

The latest public sector finance statistics show borrowing remains below forecast, although rising inflation is pushing up the cost of servicing government debt.

January is typically a strong month for public finances due to seasonal inflows of Income Tax and this year ONS data revealed a £2.9bn surplus. While this was a distinct improvement on last year’s £2.5bn deficit, it was below market expectations and £7bn less than January 2020’s pre-pandemic surplus.

While year-to-date borrowing remains significantly ahead of Office for Budget Responsibility forecasts prepared for the last Budget, higher inflation has started to push up interest payments via its impact on index-linked debt. Economists expect this to limit the Chancellor’s room for manoeuvre when he delivers a fiscal update on 23 March.

Isabel Stockton, a Research Economist at the Institute for Fiscal Studies, commented, “Borrowing remains likely to come in below that forecast in the Budget. This will doubtless be good news for the Chancellor as he prepares for his Spring Statement. But borrowing still remains high by historical standards and while he is currently meeting his fiscal targets, Mr Sunak has left himself with very little wriggle room.”

It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission.