Macro Market Analysis
In this newsletter edition we take a look at the UK and USA macro conditions.
UK
The Bank of England raised interest rates by 0.50% to 2.25% which is a 14 year high. The last time interest rates were this high was before the financial crash in 2007/2008. Since then interest rates have been at historic lows of 0.1%. These rate hikes are most likely to continue into 2023. The European Central Bank even dipped below 0% - get your head around that!
Coupled with raising interest rates the Bank of England has now stated that the UK is in a recession, which for some has been clear for some time but for a technical recession to be declared there must be two successive quarters of a decline in GDP.
According to the ONS’s August 2022 report, public sector net borrowing was £11.8bn in August which is £2.6bn less compared to 2021 however, it is £5.3bn more compared to pre-pandemic levels in 2019. Uk Gov debt interest payable was £8.2bn in August 2022 which is the highest August figure since monthly records began in 1997. Comparitively, the ONS’s June report stated overall borrowing reached £22.9bn in June which is a £4.1bn increase year on year. Government debt interest reached £19.4bn due to the macro-conditions. Whether it be £19.4bn in June or £8.2bn in August the bottom line is that Uk gov debt is increasing year on year on the monthly statistics.
Finally, according to the ONS’s August report central government receipts from April - August was £359.7bn, £40bn more than a year earlier however, central government expenditure was £386.6bn equating to a £26.9bn deficit.
March 2020 - March 2021 the Uk gov borrowed £314.3bn to get the country through the pandemic. March 2021 - March 2022 the gov borrowed another £133.7bn. The Uk public sector net debt excluding public sector banks was £2,427.5bn, that’s right folks we are over £2trillion in debt as a country which rose by £195.2bn in August 2021. As of August 2022 public sector net debt is now as high as 96.6% of GDP!! Yes, the UK produces just under 4% higher than its debt payments. This would be like owing £100 per month as an interest payment and then having £3.90 to pay off your capital! Ouch.
Debt has reached levels last seen in the early 1960s. Public sector net debt excluding public sector banks, percentage of GDP, UK, financial year ending (FYE) 1921 to August 2022
I’ve recently started rewatching Game of Thrones so it seems fitting to write - ‘Winter is coming’.
What can we surmise from all this data:
The remainder of 2022/2023 is most likely to be choppy and volatile.
The Uk and other developed economies are likely to experience a protracted period of inflation and a prolonged recession. Comparatively the Uk is at the more severe end of the spectrum.
This presents opportunities for patient and well research investors.
The UK is emblematic of increased international debt meaning at some point more QE is a likely necessity. Arguably it is already happening given the level of support needed to cover rising energy costs.
US Comments
The Bank of England as all the major central banks are following suit with the Federal Bank in the the USA. The U.S. Federal reserve raised interest rates by 0.75% for the third consecutive time, to a range of 3% - 3.25%. These are the highest levels since 2008 - do you see the similarities. No nation is an island in a globalised world.
Continued inflation considerations
The chart is year on year inflation history in the US and according to World Data the UK has performed worse comparatively to the US and Europe. The UK also had 3 peaks of inflation as did the US, will history repeat? If so, where are we now? If not, why not?
My view is that nobody really know because the financial landscape is different to before as per the level of national debt, GDP and immigration. The bottom line though - clearly these is no quick fix therefore investors need to buckle up for the ride of a decade and remember, what goes up must come down.