This week the soaring costs of energy dominated the headlines again. The confirmation of the price cap increase in the UK means people are likely to pay almost three times as much on their energy bills this winter, while the market rate of electricity in Germany and France continued to skyrocket. Much focus is on Russia’s actions. It is planning to shut down the main gas pipeline into Europe later this month, supposedly for temporary maintenance. The huge surge in gas prices signals people aren’t convinced they’ll restart it.
Elsewhere there is more bad news on the horizon. Leading indicators are showing a big decrease in economic activity as rising rates and costs squeeze businesses and consumers. While data released this week showed economic growth and earnings in the US holding up, these figures are somewhat lagging. Housing and manufacturing data show a collapse in new home sales and orders and are more reliable canaries, typically leading a recession by six to 12 months. The next domino to fall would be earning and profitability, a sure sign that recession was indeed imminent.
GLOBAL: FALLING ECONOMIC OUTPUT RAISES STAKES FOR CENTRAL BANKS
Purchasing Managers’ Indices for the UK, US and Europe fell sharply this month. The UK remains in positive, or expansionary, territory for now but the composite PMI for Europe has fallen below 50 while the same measure for the US sank to 45 – the lowest reading since the start of the Covid pandemic. The drop in activity raises the stakes for central bankers trying to curb inflation while preventing economies tipping into recession. The world’s central bankers have gathered for the annual symposium in Jackson Hole, Wyoming and attention is on the US Federal Reserve chair’s speech. The dollar has been strengthening this week on the expectation that the Fed will remain committed to aggressive rate hikes.
The slow down in UK growth has been accompanied by a revision to UK GDP for 2020. The update from the Office for National Statistics found the impact of the Covid recession was worse than first thought as GDP shrank by 11%, rather than 9% as previously reported.
COMMODITIES: SURGING PRICES PAINT A BLEAK PICTURE FOR UK INFLATION
The price of natural gas increased by 10% on Monday as fresh fears of reduced Russian supply and warnings of winter shortages rattled energy markets. The sharp increase takes the gas price back to the level seen at the beginning of the invasion of Ukraine and led to predictions that UK consumer inflation will hit 18% in January. Russia has confirmed the Nord Stream 1 pipeline will be closed for further maintenance later this month amid speculation it will not be reopened.
The price cap for UK domestic energy bills has jumped 80% and this has prompted fresh warnings about the cost of living crisis and calls for further support for households. Businesses are also facing the impact of sharply rising energy costs. Without the benefit of a price cap, businesses are feeling the full force of the surge in energy costs as companies are facing a four-fold increase. This has prompted several warnings about the number of businesses that will be forced to close if government support is not introduced.
CHINA: NEW ATTEMPT TO BOOST ECONOMY AND REVIVE PROPERTY MARKET
The Chinese government has unleashed a variety of stimulus measures to try and revive the country’s flagging economy. On Monday, the main residential mortgage rate was cut – this is the second reduction this year. The government also announced a $44bn stimulus package to be rolled out through two state-controlled policy banks to boost consumption and increase business investment. This follows last week’s cut to one of the key inter-bank lending rates after the latest consumer spending and industrial production
numbers came in below target.
At the end of July it emerged that the government is preparing loans worth $148bn to help developers complete the millions of homes that remain under construction as they struggle to raise new funding. Sales of new homes have dropped sharply as confidence among buyers evaporates and house prices have been falling for the last three months. Strict Covid lockdowns are also reducing production and depressing consumer spending.