The Mini Budget …

What Happened?

A bold budget or a fool’s notion?

The UK, and frankly the world, is in a state of flux following the numerous recent events including Brexit, the worldwide pandemic and war in Ukrane.  The net result in the UK is that energy costs are up, interest rates are the highest for years, inflation is at a high and currency is at a low.  Following the appointment of a new leader of the conservatives, a new Prime Minister was appointed.  Immediately we learned about the new team put in place to steer the country out of the challenges towards growth.  These appointments included a new Chancellor of the Exchequer.

A “mini-budget” was then put in place, which received mixed reviews to say the least.                                                                                                                                   

The headline message from the Chancellor was…

“The Growth Plan 2022 makes growth the government’s central economic mission, setting a target of reaching a 2.5% trend rate. Sustainable growth will lead to higher wages, greater opportunities and provide sustainable funding for public services. The United Kingdom currently faces a period of high inflation. The government has already taken significant steps to address high energy bills, the biggest challenge, by announcing the Energy Price Guarantee.

To drive higher growth, the government will help expand the supply side of the economy. The Growth Plan sets out action to unlock private investment across the whole of the UK, cut red tape to make it quicker to deliver the UK’s critical infrastructure, make work pay, and support people to get onto the property ladder.

Taken together, reforming the supply side of the economy, cutting and simplifying tax, and maintaining fiscal discipline will drive efficiency, enhance UK competitiveness, and help to boost growth sustainably in the long term.

Facing pressure, the government reversed a key policy element within a very short period of time.  Namely, they decided not to eliminate the 45% tax that high earners were due to receive from April 2023.”

Below we explore some of the key elements that led to this reversal.

In addition, we explore what is happening in other countries.

IMF

Who they are: –

The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is “working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

What they say: –

The International Monetary Fund (IMF) has criticised the UK government’s mini-budget, saying the plans for tax cuts and spending will increase inequality and counteract the Bank of England’s monetary policy.

Here is what they said: –

“Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy,”  THEY WENT ON TO SAY … “The nature of the UK measures will likely increase inequality.”

A few key points from the news: – 

• 40% of mortgage deals or offers withdrawn – Between Friday and today (29^th September) a total of 1,621 residential mortgage products have been withdrawn leaving 2,340 on sale today.
• Radio host slams Liz Truss for ‘same scripted answers’ as she sticks to economic plan and blames global pressures for economic crisis. – James Hanson on BBC Radio Bristol said Ms Truss was giving “the same scripted answers” – in what was her seventh local radio interview since 8am.
• Ed Conway – Data and economics editor at Sky – presents latest interest rate forecasts – with peak at 6.1%
• Mark Kleinman: My contacts tell me Number 10 doesn’t think there is a crisis 
• BUT Investment Analysts appear to be to positive.

The Chancellor’s Plan

According to the Financial Times –

Chancellor Kwasi Kwarteng’s Growth Plan sounds ambitious but it needs to reassure both markets and ordinary Britons that their economic security is in safe hands, investment analysts have said.

Speaking as the chancellor unveiled a package of more than 30 measures to tackle high energy bills, drive down inflation and cut taxes to drive growth, while maintaining responsible public finances, commentators have welcomed the boldness but warned it might not be enough.

In his mini-Budget today (September 23), Kwarteng said igniting growth by lowering taxes and cutting regulation was this government’s central mission.

He said the plan would encourage business investment, drive growth, create jobs, improve living standards for everyone and promote confidence in the UK economy.

What about other countries?

US Mortgage Rates Surge for 6th Week – Source Trading Economics

The average rate on a 30-year fixed mortgage climbed to 6.7% this week, the highest since July 2007, up from 6.29% last week and 3.01% a year ago, according to a survey of lenders by mortgage giant Freddie Mac. The 15-year fixed-rate mortgage averaged 5.96%, up from 5.44% last week and 2.28% a year ago. The average rate on a five-year Treasury-indexed hybrid adjustable-rate mortgage, or ARM, was 5.30%, up from 4.97% last week and 2.48% last year. “Our survey indicates that the range of weekly rate quotes for the 30-year fixed-rate mortgage has more than doubled over the last year. This means that for the typical mortgage amount, a borrower who locked-in at the higher end of the range would pay several hundred dollars more than a borrower who locked-in at the lower end of the range.” said Sam Khater, Freddie Mac’s Chief Economist

US Stocks Sell-Off Resumes

The Dow lost more than 500 points on Thursday, while the S&P 500 and Nasdaq lost 2.4% and 3.1%, respectively, amid persistent worries about tightening financial conditions and slowing economic growth. A hotter-than-expected inflation reading, with core PCE prices for the second quarter above expectations, raised concerns of inflation becoming even more entrenched. At the same time, better-than-expected jobless claims numbers painted a picture of an economy that can likely withstand more central bank tightening. Hawkish rhetoric adopted by several Fed policymakers about the central bank’s battle against inflation has stoked further angst in markets. For the quarter, the Dow and S&P 500 are on track for their third consecutive quarterly loss for the first time since 2015 and 2009, respectively. Bucking the overall positive trend, the Nasdaq is poised to break a two-quarter losing streak.

Stocks in Spain Hit 22-Month Low

The IBEX 35 index amplified losses and plunged over 2% to a 22-month low of 7,272 on Thursday afternoon, amid concerns about the economic outlook, global monetary policy tightening and escalating geopolitical tensions. A stronger-than-expected reading for Germany’s inflation in September raised fears of more aggressive tightening from the ECB. On the domestic data front, flash estimates showed Spain’s consumer price inflation eased more than expected to 9% year-on-year in September 2022, moving further away from a 38-year high of 10.8% hit in July. A separate report suggested Spanish business morale improved slightly in September. Within the Spanish selective, almost all sectors were trading in the red, led by tourism-related stocks and retailers. Banks were also under pressure.            

Stocks in Ireland Hit 23-month Low

ISEQ decreased to a 23-month low of 6172

Canadian Shares Approach 18-Month Low

The S&P/TSX Composite Index fell 1% to 18,450 on Thursday, partially erasing last session’s sharp rebound and approaching the 18-month lows hit this week as worries of aggressive tightening by major central banks continued to pressure growth expectations and demand for Canadian heavy-weighing commodity-backed stocks. Gold miners were among the losers in the session after surging yesterday, lowering Toronto’s resource index as bullion prices retreated. Muted crude oil prices also pressured energy producers and distributors to drop over 1% on average. Among single stocks, the Royal Bank of Canada fell 0.5% despite Barclays’ upgrade of the stock to “overweight”. On the data front, advance estimates showed that the Canadian economy stalled in August, although July data was revised to show a slight expansion instead of contraction.

What about Consumer Confidence?

https://www.conference-board.org/topics/consumer-confidence/press/CCI-July-2022

“Consumer confidence fell for a third consecutive month in July,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The decrease was driven primarily by a decline in the Present Situation Index—a sign growth has slowed at the start of Q3. The Expectations Index held relatively steady, but remained well below a reading of 80, suggesting recession risks persist. Concerns about inflation—rising gas and food prices, in particular—continued to weigh on consumers.”

Here is what The Conference Board Says

• Consumers were mixed about the short-term business conditions outlook in July.
  • 14.0% of consumers expect business conditions will improve, down from 14.6%.
  • Conversely, 27.2% expect business conditions to worsen, down from 29.7%.
• Consumers were also mixed about the short-term labor market outlook.
  • 15.7% of consumers expect more jobs to be available, down marginally from 15.9%.
  • Conversely, 21.4% anticipate fewer jobs, down from 22.2%.
• Consumers were more pessimistic about their short-term financial prospects.
  • 14.7% of consumers expect their incomes to increase, down from 16.1%.
  • 15.7% expect their incomes will decrease, up from 15.3%.

A Final Thought

As a business owner, market conditions change.  Perhaps the best approach is to focus your energy on those elements that you can control.  The world needs our leaders to be right.  We need the world to get back on track.  But all we can do is focus on those elements that are in our control. 

Keep going!  You can do this!!

If you’re going through hell, keep going.”

— Winston Churchill