STAGFLATION: UK has been in the eye-of-the-storm this year. With some of world’s highest inflation after triple-whammy of soaring energy costs, very tight jobs market, and Sterling slump. Whilst growth hit by a big squeeze on consumer incomes, government tax grab, low productivity, and Brexit overhang. The 7%+ of GDP unfunded spending splurge from new Truss government is a mixed blessing for investors. Big tax and energy support give-aways cushion the coming recession and slash the inflation peak. But at a risky cost of more debt and inflation pressure. This is taking a toll on Sterling and the bond market (see chart). But the world-leading FTSE 100 performance this year remains a stark reminder that stock-markets are not equal to economies.
SPENDING: Friday’s UK emergency budget ‘growth plan’ is set to give away around £30 billion of tax cuts, equal to over 1% of GDP. Scrapping the 1.25% national insurance increase from earlier this year alongside delay to the April 2023 corporation tax boost from 19% to 25%. Less likely, but possible, is a cut to the 2-12% stamp duty on house purchases. Average prices are up 7% this year, already the best performing asset. Tax cuts come on top of the £150 billion energy crisis aid for consumers (for two years) and businesses (six months). This is equal to 6%+ GDP.
IMPACT: This dramatic support is welcome in the short term, allowing the UK to step back from the brink of stagflation. This is evident in recent ‘less-bad’ performance of sensitive assets like FTSE 250. But it will worsen the UK’s large 6% budget deficit and near 100% debt/GDP. Whilst working against Bank of England which is hiking interest rates fast to cool inflation, and implicitly the economy. This will keep investors on edge, and Sterling and bond prices under pressure.
All data, figures & charts are valid as of 21/09/2022