Autumn 2022 UK Market Report
Other factors
Political and market uncertainty
Chaos followed the 23 September mini-budget where £45 billion of unfunded tax cuts were announced.
The markets were spooked by the mini-budget:
- London stocks fell sharply as the pound fell to a record low of 1.03 against the US dollar
- Lenders withdrew 1,621 mortgage products from the market, amid uncertainty over the future trajectory of base rates
- The Bank of England triggered an emergency £65 billion bond-buying programme, putting pension funds at risk of insolvency
- The yields on 10-year gilts — UK government bonds — surged from 3.5% to 4.3% before falling back to about 4.05% after the Bank of England’s intervention.
A series of U-turns followed, with much of the plans now reversed and only three major announcements from the mini-budget remaining in place:
- The cut to stamp duty
- The National Insurance reduction from April
- The £1 million investment allowance.
Liz Truss announced her resignation on 20 October after just 44 days as prime minister. It was announced that a leadership election would take place and Rishi Sunak became prime minister on 25 October 2022.
Jeremy Hunt warned that eye-wateringly difficult decisions lie ahead, with “reductions in spending or increases in tax”. A fiscal statement was planned for 31 October, however, this was delayed until 17 November and upgraded to a full Autumn Statement which will include an economic and fiscal outlook from the Office for Budget Responsibility (OBR).
The OBR produces independent forecasts for economic growth and public finances and is expected to say that a £39 billion shortfall predicted in March in public spending has grown significantly. The weaker economic outlook will also raise government borrowing.
There has been suggestion that energy windfall tax measures could be expanded as energy companies announce large profits. Described as the Energy Profits Levy, the Treasury expects it to raise about £5 billion in the first year. However, the windfall tax allows energy companies to apply for tax savings worth 91p for every £1 invested in fossil fuel extraction in the UK. The tax also only applies from 26 May.
Threat of reduced government investment
The COVID-19 pandemic had an enormous impact on public finances, leading to the highest borrowing to gross domestic product (GDP) ratio since the end of World War Two. Although it has now been scaled back, the energy price guarantee support from the government is expected to lead to further significant borrowing.
Public sector net borrowing (excluding public sector banks) was £20 billion in September 2022. This is £2.2 billion more than in September 2021 and the second-highest September borrowing since monthly records began in 1993, being £8.2 billion lower than in September 2020 at the height of the COVID-19 pandemic.
High inflation is also affecting the cost of servicing central government debt, with ONS data showing significant increases since mid-2021.
Analysis from the ONS shows that rising costs are largely a result of higher inflation, with interest payable on index-linked gilts rising in line with the Retail Prices Index (RPI).
The ONS data for September 2022 shows the interest payable on central government debt was £7.7 billion, with £4.7 billion of this reflecting the impact of the RPI. This is the highest September figure since monthly records began in April 1997.
Despite inflationary challenges, various factors will require spending to mitigate, as outlined in the OBR's ‘June 2022 Fiscal risks and sustainability report’:
Rising geopolitical tensions
Increased defence spending
Increased defence spending is expected across Western countries in response to Russia’s invasion of Ukraine. The raised tensions have also caused increased global economic fragmentation.
Higher energy prices
Fossil fuel price shocks
High fossil fuel prices can be economically and fiscally disruptive, as seen in the late 1970s and early 1980s. Investment and alteration of the energy mix is needed to reduce dependence on fossil fuels and meet the ambition of reaching net zero carbon emissions by 2050.
Long-term fiscal pressures
Updated demographic projections
Demographic pressures have eased since the 2018 Fiscal and sustainability report due to a lower birth rate, slower improvements in life expectancy and lower migration. However, in the longer term, the pressures of an ageing population on spending and loss of motoring taxes in a decarbonising economy leaves public debt on an unsustainable path in the long term.
For the construction industry, there is a solid pipeline to support defence, energy security, the transition to net zero carbon and meet population needs.
Highlighting this, John Pettigrew, CEO of National Grid, told the BBC that in order for the UK to meet government targets of a 400% increase in offshore wind by 2030, big changes in planning and regulation will be required to quickly build the hundreds of miles of new cables and overhead pylons to transport energy from the east coast, where most will be produced, to the south of England where most energy is used. He said, “We will need to build about seven times as much infrastructure in the next seven or eight years than we built in the last 32.”
The Resolution Foundation has warned that cuts to public infrastructure spending would save money in the short term but would reduce growth over the rest of the decade.
There is concern however, that spending may be postponed or expended over a longer period due to the economic challenges currently faced, which would also endanger climate targets and economic growth.
COVID-19
UK
According to data from the Office for National Statistics, about one in 30 people in England had COVID-19 in the week ending 10 October, based on swabs from randomly selected households. This figure is an increase from one in 35, the week before.
A rise in levels of infection was also reported in Wales, reaching one in 25, although the trend was uncertain in Northern Ireland and Scotland.
It is hoped that the peak may have passed; data from NHS England shows that while 8,198 COVID-19 patients were admitted to hospital in the seven days ending 10 October, this fell to 7,809 in the week ending 17 October.
Concern has been raised about a possible “twindemic” this winter, with worries that influenza may cause a larger impact this year, as it did earlier in 2022 in Australia, following low levels over the past three years as a result of COVID-19 measures.
China
China continues to pursue its “zero COVID-19” policy. The BBC found that since March, China has partially or fully locked down 152 prefecture-level cities, affecting a population in excess of 280 million, with 114 of those locked down since August as the Party Congress approached.
The Party Congress occurs every five years and at the opening speech on 16 October, President Xi Jinping signalled no looming change to the approach, saying that the rules protect people’s lives.
It was hoped that the end of the congress would bring an easing of restrictions. However, the opposite seems to be happening. Bloomberg reports indicate that fresh lockdowns have been imposed across China and a survey by Japanese bank, Nomura, found that the number of Chinese under COVID-19 control measures on 27 October was 232 million, with the 31 cities under some form of lockdown accounting for one in six people in China and 24.5% of its GDP.
There is an economic toll to the policy. China’s official manufacturing Purchasing Managers Index (PMI) recorded a contraction in activity in October (49.2), down from the modest expansion (50.1) noted in September. The non-manufacturing PMI also registered a decrease, from 50.6 in September to 48.7 in October.
Reductions are expected for the upcoming months due to rising COVID-19 cases, reduced construction activity and the likely weakening demand for exports.
Research by JLL shows that investment volume in the country is down 55% year-on-year in 3Q 2022, from $7.3 billion to $3.3 billion.
The International Monetary Fund forecasts China’s GDP will expand by just 3.2% this year, down from 8.1% growth in 2021.
China accounts for more than 50% of global demand for raw materials so it has a widespread influence on the global economy.
Delivery issues
Freightos update
The Freightos update on 19 October indicated that global freight rates and volumes are falling after a two-year climb.
Congestion has been easing, with the number of container ships waiting for a berth off North America improving since July, dropping from more than 150 to less than 100 in the week of the update. However, it is noted that pre-pandemic this number would have been in the single digits.
Port congestion on the US East Coast and at many major European hubs may be slowing the rate of fall on routes despite falling volumes.
Rates on the Asia-US East Coast route have declined by 67% since April but remain 111% higher than in 2019. Asia-US West Coast prices have fallen 84% since April and are 82% higher than the same week in 2019.
From January to August, China to North Europe volumes reduced by 6% compared to last year. Falling demand has also caused rates to fall by 64% since the start of the year. However, persistent congestion has kept prices more than 4.5 times higher than in 2019.
UK port strikes
Strikes at the Port of Liverpool and Felixstowe were seen in August, September and October, over pay disputes.
MarineTraffic, a global maritime analytics provider, told the BBC that one of the key measures in shipping is the TEU, which stands for twenty-foot equivalent units.
Alex Charvalias, the company's supply chain in-transit visibility lead, told the BBC, "On 30 September, the total TEU capacity waiting 'off port limits' [just outside a port] for container ships has been the highest observed in recent months, reaching more than 65,500 TEUs." Between June and July, the capacity of containerships waiting off port limits was between 20,000 and 30,000 TEUs.
Paul Davey, head of corporate affairs at operator Hutchison Ports (UK) told the Transport Select Committee that the slowdown in retail sales meant most of Felixstowe’s port customers already had enough stock for Christmas and that COVID-19 and other issues have led to customers becoming used to delays.
Davey said that customers had brought forward shipments, delayed picking them up around strike days or rerouted deliveries to other ports.
Further strike action is expected, as disagreements over pay continue.
