Now there’s more interest in economic data | Chris Davies

The latest economic data makes for predictably grim reading, given we are now enduring a period of stagflation (where inflation outstrips economic growth).

Whilst it would be churlish to ignore the impact of COVID-19 and it is only reasonable to acknowledge the effect of the Russian invasion of Ukraine, it would also be foolish to pretend that the majority of the turbulence the UK economy is suffering and will endure in 2022 does not emanate from government “policy”.

Unemployment

On a bright note, Unemployment fell slightly to 1.34M, which is broadly equivalent to the number of job vacancies in the economy. That is where the sunshine ends and the clouds begin to descend.

Interest rates

As predicted, the Bank of England’s Monetary Policy Committee (“MPC”) increased interest rates for the third successive month, by 0.25% to 0.75%. As 4 of its 9 members had wanted to do increase to this level at the previous meeting, it was far from unexpected. 

The MPC forecast that inflation will likely exceed 8% in 2022. This is using the Consumer Price index (“CPI”) benchmark, where the current rate is 5.5%. As the Retail Price index is currently at 7.8% and energy bills have yet to increase by an average of 54%, their forecasting is hardly the stuff of Hogwarts. Many people are already seeing real world inflation in excess of 10%.

One small ray of light is the suggestion that expected future increases of this magnitude may come less frequently. Given every increase impacts the risk of mortgage defaults and repossessions (and inflation will be checked as discretionary spending will naturally reduce due to lower net disposable incomes), I cautiously welcome this news.

The MPC must avoid the urge to “do something” for the sake of it to try and check inflation, which their pandemic related Quantitative Easing exacerbated (too much for too long and interest rates should have been increased 12 months ago).

It is noteworthy that the US Federal Reserve also increased its Fed Funds rate by 0.25% and has forecasted a further 6 increases at this level are expected in the US during 2022, which would take their base rate to around 2%. 

As US inflation is at a 40 year high, and national debt is over $30Trillion (and budgeted to grow by $1.3Trillion a year throughout the 2020s), this policy is likely to impact the US housing market (through mortgage defaults and repossessions) and ultimately increase inventory and reduce prices.

Wage inflation

Wage inflation increased from 3.4% to 3.8%, still substantially below CPI inflation (5.5%). Given increasing food, energy and rocketing petrol/diesel costs (as well as increased interest rates for those on variable rate mortgages), net disposable incomes are shrinking. In short, on average, we are all getting poorer.

Vehicle fuel

Petrol and diesel prices have rocketed since the Russian invasion of Ukraine. At one stage, oil was around $140 a barrel. It ended the week almost 25% below that at $107.7 a barrel.

Despite the fall in oil prices, unleaded petrol prices remain around £1.70 a litre and diesel is closer to £1.80. As over 20% of “British” diesel is refined from oil in Russian refineries, expect the widening gap between unleaded and diesel to remain a trend. 

Whilst the government has temporarily frozen the accelerator on fuel duty (where fuel duty increases proportionate with price increases), the Treasury’s coffers have been swollen by the increased VAT generated by price rises. Around 50% of a litre of fuel is taxation.

Commodity prices – bad news for electric cars

Whilst Nickel has had a very volatile week, which led to a suspension of trading, it has eased back from its high watermark but remains up over 50% since January 1st.

That is as nothing compared to Lithium, which is up a staggering 485%. 

Both components are staples in electric vehicle batteries and with prices unlikely to reduce back to “base levels” any time soon, electric car manufacturers in particular will have to pass on at least some of the increases to buyers in the months ahead.

Energy policy

On 9th March 2022 at Prime Minister’s Questions, Boris Johnson confirmed that nuclear power will be a key component of the UK’s long-term energy mix, which is welcome.

Johnson also confirmed that the government would bring forward to the House of Commons proposals for energy independence. Again, a welcome statement of intent.

This week, however, the following occurred:

• The United Kingdom paid a decades old debt to Iran of £400M, sparking the release of 2 British/Iranian nationals including Nazanin Zaghari-Ratcliffe on the same day Johnson was meeting with leading OPEC oil producers, including Saudi Arabia, to ask them to increase oil production. Given Iran and Saudi Arabia are fighting a proxy war in Yemen, the timing was “unfortunate at best”;

• Saudi Arabia killed 4 “criminals” within hours of Johnson’s plane landing for his meeting with Mohammad bin Salman. They did not agree to increase oil production;

• Johnson met with leaders of the United Arab Emirates (“UAE”), including Dubai, to lobby for increased oil production. They refused.

Changing which despots we import additional oil from to replace Russian oil is not “energy independence”. Issuing more licences for North Sea oil exploration would at least begin to tackle the medium term capacity.

As both Saudi Arabia and the UAE politely declined to increase oil production, perhaps settling the long standing debt to the Iranians might encourage the mullahs to sell us some oil. Except they are geopolitically aligned with Russia so, perhaps not.

Borisphiles may applaud him for “doing something” but others may argue that these (unsuccessful) in person meetings could have been replaced by a phone or video call.

The government must also come off the fence on fracking. The Bowland basin in the North West of England holds between 50 and 100 years of shale gas reserves. Cuadrilla has yet to be told whether or not to fill the 2 existing drill holes (at a cost of £1M) or if the government will lift the moratorium on fracking.

If we desire energy independence (and burning gas is less environmentally damaging than other hydrocarbons), fracking must be explored.

Foreign aid to Russophiles 

Both Pakistan and India have approached Vladimir Putin to express their desire to buy Russian hydrocarbons to meet their energy requirements.

Whilst it is not necessarily for the UK to pass judgement on their choice of supplier, in the spirit of sanctions against the pariah Russian state, we must cease providing foreign aid to both countries, both of which are nuclear powers. 

For the record Pakistan receives around £200M in foreign aid, whilst India receives just over £55M. There is no geopolitical or economic “soft power” advantage to the UK from these payments, which must stop immediately.

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