There has been a lot of hyperbole, exaggeration & vitriol following last week’s budget. Screams that the new PM is driving the country into recession & a property crash. Demands she should u-turn.
I decided to look beyond that and at the actual data...
Lots of it has failed to put the market moves into perspective. This is a global event caused by Federal Reserve tightening. It is not just the pound that is at decades long lows against the mighty dollar. It is the Yen, the Won and yes even the euro.
It is not just the B of E which is rushing to keep up with the Feds rapid & significant base rate rises. Not just UK which is seeing mortgage rates rise rapidly as a result. It is happening all over the world.
Update on my "Mortgages - some perspective" thread today.
I keep being asked what about forecasts for higher interest rates in future?
Why is this only happening in the UK?
Is it the Government's fault as we keep being told by the media?
Well..
The media is also failing to put the rate rises into perspective within a UK context. There have been hundreds of apocalyptic articles & news reports, much so exaggerated that it can only be designed to scare & panic people.
Mortgages – some perspective
You may have seen a lot of hyperbole about the mini budget causing a spike in UK Government bond yields and the effect it will have on mortgages, property prices and the general economy.
I wanted to try to put the issue into perspective.
For those on a tracker mortgage (which follows BofE base rate), the rate has increased from 1.75% to 2.25% or +0.5%. According to U Switch, each 0.5% rate rise on a £150k mortgage with 20 yrs remaining would add £38 per month to repayments.
For those on a Standard Variable rate mortgage (SVR), the average SVR has risen from 3.74% to 4.74%. This average 1% increase in the SVR would add £76 a month; £17.50 a week to repayments.
That is equivalent to one Starbucks coffee every weekday
But I am not here today to look at the failings of the media to put the mini budget into perspective. I am here to look at what happens next. Once the furore and sentiment driven response has ended and the markets start looking at the actual data.
To do that, I thought it might be helpful to look at two recent economic forecasts. One from the National Institute of Economic & Social Research (NIESR) providing updated forecasts for UK post the budget. The other from Deutsche Bank on EU economy just a couple of days before.
First the NIESR.
“We now forecast the energy support guarantee, together with the tax cuts announced today, will lead to positive GDP growth in Q4 of this year, shortening the recession and raising annual GDP growth to around 2 per cent over 2023-24.”
Second Deutsche Bank
“now expects EU-area growth to decline 2.2% in 2023, from a previous forecast for 0.3% decline. Germany & Italy most at risk, given reliance on Russian gas. German GDP is expected to drop 3.5% in 2023, & Italy to see a 2% decline.”
The NIESR forecast has now been joined by others, including the French banking giant BNP, which also sees UK growth in Q4 2022 (avoiding a UK recession by their estimation) and c2% GDP growth in each of 2023 and 2024.
So as the data begins to come through markets are increasingly looking at a building consensus that the budget will not only save the UK from recession in H2 2022, but also lead to c2% GDP growth in each of 2023 and 2024 at a time when Germany and EU will be in a deep recession.
But growth wasn’t the only issue “worrying” commentators with the budget. One of the most hyped complaints was that the Government spending commitments and tax cuts (really reversed tax rises) would be financed out of increased Government borrowing.
Westminster is obsessed with Chancellors pulling "rabbits" out of Budget hats.
But today Kwarteng felt like the Dr Frankenstein figure in Wallace + Gromit's 'Curse of the Were-rabbit', unleashing a bumper bunny of borrowing.
Let’s look at the NIESR forecasts again.
“We expect the extra government spending and tax cuts to increase the government deficit…we now forecast public sector debt to rise to 91.6 per cent of GDP in 2024-25, rather than fall to 87.5 per cent of GDP.”
Well in Japan debt to GDP exceeds 240%. In the USA it is 124%, Italy 122%, France 115% and Canada 101%. Only Germany, with debt to GDP of 70% is below the UK (and some forecast this figure to exceed 80% as a result of the upcoming recession)
So 91.6% doesn’t seem particularly bad in comparison. Does it?
And this might well turn out to be a too pessimistic estimate. The CEBR today published an article entitled “Public borrowing may be less out of control than the markets think”.
In it they argue that instead of Government borrowing an extra £154b in 2023/4 it will be c60% less at £64b, and will actually run a tiny surplus in 2025/6.
Although they do not publish debt to GDP forecasts, my back of the envelope calculations suggest in this scenario UK debt to GDP would actually fall to the mid 80% range.
So yes the UK budget does increase borrowing to fund energy support guarantee, tax cuts & investment incentives intended to drive higher long term growth.
But the borrowing increase is by no means bumper bunny, still leaves the UK as one of the least indebted G7 nations & is forecast to drive higher growth of c2% pa at a time when the EU 27 are forecast to see GDP fall between 2-3.5%.
When the panic, hype & vitriol end & markets stop being driven by sentiment but start to look at the actual data, it is clear UK position will start to look relatively rosy.
And the Truss/Kwarteng mini budget will be recognised as one of the key reasons for that...