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Is a change in the air?
CPI so high, have now gone into reverse with wholesale energy prices halving over the past three months. And imported goods’ cost is down (UK Producer Price Index fell in November and December) as many of the production difficulties faced post Covid have eased. This markedly changed outlook for inflation and, albeit to a lesser extent, interest rates is going to usher in a more comfortable lending environment. Although mortgage interest rates are not going to fall nearly as fast as inflation, we can expect a stabilisation of rates with gradual falls starting to benefit the nine million who currently have to finance mortgage payments. Already, three, five and 10--year fixes have been falling (Virgin Money recently unveiled a 10-year fix for 3.99% (£1,188 fees)). This could turn out to be well timed for
the present government. Some might say the Conservatives appear to be ‘lining up their ducks’ in preparation for an election call sometime in mid 2024. Rishi Sunak is obliged to hold an election by January 2025 at the latest. But will the 2023 Budget hike in Corporation Tax pave the way for healthier public finances and a giveaway Budget in 2024, followed by an earlier election? Things certainly seem to be shaping up for just such a scenario. The Prime Minister recently flagged five goals for 2023 that he wants the electorate to judge him on (halve inflation, grow the economy, stop migrant boats, curb debt and cut NHS waiting lists). Perhaps the government intends to time the successful delivery of these in early 2024 with much lower inflation, falling interest rates and a timely
upswing in consumer sentiment. If I were an election adviser looking at Labour’s present 20-point lead, I might be viewing this as the strategy most likely to give the Tories a chance of re-election. Putting aside the political considerations about whether the country would be better off with a Labour or Tory government in 2024/25, this changing economic backdrop is obviously going to be good news for those of us involved in the finance sector. Certainly it is one that is refreshingly different from the dismal one we were experiencing during the dark days of 2022.
Are we set for a return to economic stability followed by an upswing in consumer sentiment and an earlier-than-expected general election?
Is it possible that the economic rollercoaster ride that we have all been experiencing in recent months is almost over? In the distance we can see the barriers at the end of the track, and the possibility we can sigh with relief and safely alight. Sure, the Silicon Valley Bank’s failure, followed by problems at Credit Suisse and Deutsche Bank, have jolted our carriage unexpectedly, but we would be forgiven for expecting normal service to be resumed shortly. We are looking forward to putting behind us the drama of wildly fluctuating inflation and interest rates, together with the shambolic “KamiKwasi” budget. No one wants a repeat any time soon of the cortisol rush they experienced in 2022, when those in charge managed to engineer both an increase in the inflation rate
from 4% to 11% within the space of nine months, plus an interest rate hike from 0.5% to 4% over a similar period. Fortunately, with Spring in the air, it now looks likely that the economy is reverting to a more stable and predictable trajectory, underpinned by the prospect of much lower inflation, sensible interest rates and a rather boring budget. In this climate, boring is good! All those doomsday-like macroeconomic factors that were lined-up in the closing months of 2022 are becoming smaller in our collective rear-view mirrors. The Ukraine War has not led to unleaded at £5 per litre or queues at the petrol pumps as some suggested, nor has it resulted in empty supermarket shelves and blackouts, as others would have had us believe. Inflation, which did take on scary dimensions in October/November, has
peaked and is predicted to fall back by the summer and go even lower by Christmas, a wage price spiral is not on the cards. And the public sector strikes that threatened a Winter of Discontent have not been as disruptive as some of the unions would have liked. There continue to be problems with the NHS that have undoubtedly been exacerbated by the industrial action, but the rail and teaching disputes have not brought the country to a halt and seem to have been resolved. Drilling into the detail, the current Consumer Price Index rise of 10.4% is now forecast to more than halve to 4% by the Summer (Bank of England) and hit 2% as the year closes (CitiBank predicts 2.3% in November; Investec 1.6% in December). Believe it or not, the OBR forecast even predicts deflation from late 2024 through to mid 2026. The energy and food prices that drove
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