Bleak Outlook Forecast By The Bank Of England

Market Update 5th August 2022

This week the Bank of England forecast a recession in Q4 2022. Consumer price inflation, driven principally by price rises in energy, food, and physical goods hit 9.4% in June. The Bank now forecasts inflation to continue to rise in the coming months, peaking at 13.3% in Q4 2022. This is a significant increase compared to the Bank’s previous prediction of 10%, and we should not assume that 13.3% is the worst that inflation could peak to this year.

It was only January when the bank was predicting inflation of more than 6% and saying gradual interest rate rises would be able tame it and the UK could sidestep a recession. Back then Governor Andrew Bailey was talking about the squeeze on the cost of living to providing a way of easing inflationary pressures.

If the bank’s prediction is right and inflation tops 13% this year, we’re likely to experience a recession that could last to the end of 2023. However, it is the forecast of an average real terms drop in income of 5% which should be alarming for the next prospective residents of numbers 10 and 11 Downing Street because nothing gets a politician voted out of office quite like a sharp fall in the standard of living in their electorate. At the last election Boris Johnson campaigned on the promise of ‘levelling up’ but the economy has been badly hit by the combination of locking down the economy for much of 2020 and 2021, and now the impact of the war in Ukraine that has caused a surge in energy and other commodity prices.

  GLOBAL: RECORD OIL COMPANY PROFITS AS OPEC TWEAKS PRODUCTION TARGET

BP is the latest energy company to announce bumper profits as it reaped the benefit of high oil and gas prices. BP’s underlying profits for Q2 jumped to $8.5bn, more than three times its profits for the same quarter in 2021. Last week Shell reported record profits of $11.5bn. This comes in the same week as warnings that UK energy bills are set to rise higher than expected and remain high for longer with Cornwall Insight predicting average domestic energy bills will remain above £3,000 a year until 2024.

The Bank of England also warned that high energy costs are eroding living standards. The latest meeting of the OPEC+ cartel of oil producing countries announced a slight increase in its production target as it remains under intense pressure to pump more oil to dampen down prices. The group agreed to increase planned production by 100,000 barrels a day, or 0.1% of total production. The price of oil has fallen more than 6% this week as some data points to a drop in consumer demand, but the consensus view is that oil is the commodity that nations cannot do without and with production only being upped by an almost irrelevant 100,000 barrels per day, the price of Brent Crude will probably head back above US$100 per barrel.

UK: BANK OF ENGLAND HIKES RATES TO 1.75%

The Bank of England raised rates by a further 0.5% as it warned it expects inflation to keep rising. The interest rate hike was in line with expectations after Governor Bailey commented on the prospect. However, the upgrade to inflation forecasts was accompanied by a warning of imminent recession which sent the yield on 10-year gilts down sharply as investors looked to safety of government bonds amid the pending slowdown. The bank expects inflation to exceed 13% by the end of the year, driven by the latest increase in natural gas, and to remain high next year before returning to its 2% target in 2024. If you want to secure your assets now, find out how we can help with wealth management.

The squeeze on living standards is expected to contribute to a recession which the bank predicts will begin in Q4 this year and last throughout 2023. The latest PMI figures show that services and manufacturing output is already dropping sharply. The prime ministerial candidates tried to use the decision to boost their campaigns with Liz Truss promising to overhaul to Bank’s inflation target while Rishi Sunak has suggested that more government borrowing would simply lead to more interest rate rises, possibly peaking at around 7%.

  CHINA: MARKETS NERVOUS AS TENSIONS OVER TAIWAN RISE

There was more volatility in Chinese equity markets this week as tensions over Taiwan’s status intensified following US House of Representatives speaker Nancy Pelosi’s visit. After its attempts to prevent Pelosi’s visit didn’t work, China launched a huge demonstration of its military and naval capability in an attempt to assert authority over its neighbour. The Shanghai Composite Index dropped 3% at the start of the week as political tensions rose.

The economic struggle between the US and China continues in other areas too. Alibaba recently became the latest company to be put on notice of de-listing in the US if it fails to meet US audit regulations. Alibaba joins Yum China, Baidu and Weibo on the long list of companies under threat of removal. Joe Biden has also recently signed the CHIPS and Science Act which promises investment of up to $52bn and to provide tax breaks of up to $25bn to encourage microchip research and manufacture in the US. Among the rules for qualifying for the benefits is a ban on significant investment in foreign countries including China.

Please note that nothing written here by the author should be construed as giving advice, it merely outlines our thinking.  Any advice will be discussed and proposed on an individual basis with each client when any advice that is given should be fully discussed with us before proceeding with any proposals made.

If you enjoy reading this weekly update, please feel free to share it with your friends and / or family who may also find the contents of interest, and do not hesitate to contact us if you need any help, information or advice yourself about any of the areas covered this week. 

Yours sincerely,

Philip A. Simmonds MBA, LL.B(Hons), FPFS, Chartered MCSI

Chartered Wealth Manager | Chartered Financial Planner

Solicitor (company in-house solicitor)

Chief Investment Officer | Head of Strategy

E : phil.simmonds@private-office.co.uk

      phil.simmonds@private-office.law (for legal matters)