Wednesday, November 23, 2022

UK
Recession fears mount as private sector to shrink for fourth consecutive month

THEINDUSTRY.FASHION
23 NOVEMBER 2022


Evidence of a UK recession is mounting as an influential survey showed the private sector economy is set to shrink again this month, although at a slightly slower pace than before.

The preliminary data from the so-called flash purchasing managers index survey indicates the country is in the middle of the steepest economic decline in nearly 14 years, experts said.


The survey, compiled by S&P Global and Chartered Institute of Procurement & Supply (CIPS), showed a reading of 48.3 in November.

It is slightly better than the 21-month low seen in October, 48.2, but still shows the economy is declining. Anything below 50 is considered a contraction, and this is the fourth month in a row the score has come below that level.

Chris Williamson, Chief Business Economist at S&P, said: “A further steep fall in business activity in November adds to growing signs that the UK is in recession, with GDP likely to fall for a second consecutive quarter in the closing months of 2022.

“If pandemic lockdown months are excluded, the PMI for the fourth quarter so far is signalling the steepest economic contraction since the height of the global financial crisis in the first quarter of 2009, consistent with the economy contracting at a quarterly rate of 0.4%.”

But worse is yet to come, Williamson warned, with the downturn likely deepening in the new year. The number of new orders that businesses received during the month fell to a nearly two-year low. This was driven in part by a reduction in new business from abroad, which dented November’s order books, especially for the manufacturing sector.

Companies said Brexit and a weak global economy was weighing on their exports, as the orders that manufacturers shipped to foreign customers dropped by the most since May 2020. For service providers the problems were slightly offset as the falling value of the pound against the dollar boosted orders from the US.

CIPS Chief Economist John Glen said: “The survey pointed to some deeply concerning developments such as the quickest fall in new orders since January 2021 and the fastest decline in manufacturing export orders since 2009 outside the pandemic years.

“The Covid veil, now almost completely lifted, has revealed the challenges still faced by exporters struggling with customs and paperwork challenges and other Brexit constraints putting off overseas customers.”


UK government faces £30bn bill to cover QE losses




Jeremy Cutler

Wed 23 Nov 2022

The government may need to pay the Bank of England (BoE) more than £30bn for the next two years to cover losses on its quantitative easing (QE) programme, a report from the central bank showed.

The BoE started buying government bonds in 2009 and the size of the QE programme peaked at £895bn in December 2021.

Until recently, the government received profits made by QE, totalling £120bn between 2009 and 2022, reflecting low interest rates.

But recent sharp rises in the cost of borrowing have meant these flows have reversed and last month the government paid the BoE £828mln to cover the losses with this cost set to grow rapidly.

Laith Khalaf, head of investment analysis at AJ Bell, pointed out: “That’s because the Treasury pays base rate on the government debt held by the Bank of England, and for the first time since the scheme was launched in 2009, that is now higher than the interest coupons on that debt.”

“On top of that the Bank of England will also require payment for the losses it sustains as it winds down its QE scheme, selling gilts below the price it bought them at.”

"This is the very thin end of the wedge, because the OBR estimates there will be cash transfers of £133bn from the Treasury to the Bank of England to cover the QE scheme over the next 5 years, adding 2.1% of GDP to government debt by 2028” he estimated.

Last week, the UK budget watchdog, the Office for Budget Responsibility, forecast that the government would need to pay the BoE £133bn up until the end of March 2028, wiping out the earlier profits.

And yesterday the BoE updated its own projections which showed projected annual net cash flows from the Treasury to the BoE of more than £30bn in 2023 and 2024 - roughly in line with the OBR's projections.

Looking out to 2033, the cumulative net loss on the QE programme could range from less than £50bn to almost £200bn, depending on the path of interest rates, the projections showed.

Market reaction - what do the financial markets tell us about the economy?

The financial markets offer insights into the well-being of the economy

By Petula Martyn

Updated / Wednesday, 23 Nov 2022

The global financial markets remained calm after UK Chancellor Jeremy Hunt delivered the autumn statement which outlined the government's plan to tackle the cost-of-living crisis and rebuild the UK economy.

The market reaction was in sharp contrast to the previous government's mini budget, which prompted a wave of market turbulence and ended with the departure of Liz Truss from 10 Downing Street.

But do market changes reflect the true well-being of the economy, or do they value sentiment over fact?

Financial markets refer broadly to any marketplace where the trading of securities takes place, including the stock market, bond market, and forex market, among others.

Dr Darren Shannon, lecturer in Quantitative Finance at the University of Limerick describes the markets as "a meeting point between those who want to lend money and those who want to borrow money, those who want to sell an item, a service or product and those who want to buy that item, service or product".


Financial markets are vital to the smooth operation of capitalist economies, and they offer insights into the state of the economy.

Dr Shannon said if you are tracking the stock market, you are essentially tracking a proxy for how the economy is working at that moment in time. "If you are seeing large rises in a stock market, in theory that should mean that the economy is going really well. If it's dropping then vice-versa, you would expect that the economy isn't doing really well."

That relationship has become contentious in recent times, he added, because stock prices are not just a measure of how much these companies are actually producing anymore, "but initially that's why the stock markets were tracked because they gave a fairly good view as to how the economy was performing over time".

Business reports often refer to 'the reaction of the markets' to an event and it can have major consequences as we saw in the UK. In a U-turn on the mini budget, then Prime Minister Liz Truss accepted responsibility for "going too far and too fast than markets were expecting".

"Markets are a good snapshot of how an economy is performing, and when countries or nations become concerned about how their economy is performing, the markets start to reflect that," Kathryn Hannon, Head of Private Clients at asset management group, Gresham House, explained.

"There are some investments that are probably more fundamental to how an economy is evaluated across the world. For example, the bond markets, that's essentially where governments issue debt to other governments or other institutions across the world, and if that becomes a little bit rattled like it did in the UK, it can call into question the government and their policy at that point in time and that's what we saw in the UK."



Ms Hannon said the UK's mini budget and how they were planning to fund it in terms of taxation and the amount of debt that the UK government was going to have to take on to do it, was not received very well by international markets. "Therefore, it was almost a thumbs down for the UK government and we all saw what unravelled from that."

Jeremy Hunt's autumn statement, on the other hand, received a muted reaction from the markets which was the desired response, according to Victoria Scholar, Head of Investments at Interactive Investor.

"Essentially what Jeremy Hunt wanted was no market reaction because he wanted it to be in stark contrast to what we saw in the fallout from the mini-budget and the fiscal fiasco around former chancellor Kwasi Kwarteng's announcement which set the pound to an all-time low and saw the government bond market plunge as well. So, this seems to be a major contrast to what we saw in September and exactly what the Treasury was hoping for," she said.

The reaction of the markets correlated with what was happening the UK, however, on any given day, you can never definitively say what is moving markets.

Kathryn Hannon from Gresham House said business reports on market reaction are "quite accurate" in reflecting the sentiment of how people feel on the high street; how governments feel in terms of confidence and spending and budgets.

She said there is a lot of noise. "It's a very broad market, there are lots of different types of companies in there, they perform differently at different points in the cycle, but yes, largely I do think they capture the sentiment."

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