Taxes, inflation, energy bills and interest rates to hit growth

The multiple headwinds that the UK is facing going forward, even as it emerges from the Coronavirus Pandemic, could easily blow the economic recovery off course.

The Chancellor of the Exchequer Rishi Sunak was seen as something of a fairy Godfather when he first arrived in the position. Within weeks of taking on the job, he was faced with supplying support for the economy.

It is generally believed that the various schemes he introduced, including furlough schemes, help for small businesses and support for the property market were skilfully considered and sufficiently targeted to ensure that the support arrived at the right place.

However, he is now being painted as some kind of Pantomime Villain, as he tries to begin to balance the books.

The budget for the coming year that was delivered to Parliament late last year has brought about unprecedented rises in personal taxation in order to claw back some of the support that Sunak provided.

It feels like the Bank of England was on the cusp of raising interest rates at a number of meetings through last autumn and as winter arrived.

The Bank’s Governor was firmly in the transitory camp as inflation began to flare up. It was felt that issues in the supply side of the economy would dissipate as quickly as they arrived.

Eventually, the penny dropped, and it became clear that the era of historically low interest rates was ending.

After something of a false start in November, a tightening of monetary policy in the shape of a small, but significant rise in interest rates was agreed as a prelude of further rises through 2022.

Arriving hand in hand with supply shortages, the four-fold rise in the wholesale price of gas has been another significant contributor to inflationary pressures in the country.

The pace and size of the increase has been both unprecedented and unexpected. The situation in Ukraine has worsened the situation, and it is considered unlikely that the price will settle down before the middle of next year.

While Sterling is receiving a degree of support from the fact that the Bank of England was the first G7 Central Bank to begin to raise interest rates, that support is likely to fade as the full effect of these headwinds arrives.

This is likely to be towards the end of the current quarter and may be further exacerbated by the continued political upheaval as the Prime Minister fights to remain in office.

For now, the pound is testing support at 1.3580 that has held firm over this week. The pound fell to a low of 1.3587 yesterday and closed at 1.3588.

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Continued rises in Covid cases driving fears

The Omicron Variant of Covid-19 is staying a more significant factor in the U.S. than it has been in the UK. This is most likely to be due to the reluctance of Americans to accept the third, or booster, shot of the vaccine.

While the administration continues to call for the population to get up to date, take up has been slow.

There is a feeling of the country becoming jaded by the entire pandemic and this has led to a feeling that the time to accept herd immunity has arrived.

The fact that during his entire Presidency, Joe Biden has been firefighting has meant that he has been unable to unfurl the policies he expected to be able to enact in the first half of his Presidency.

It seems incredible that the country is already considering the midterm elections that will be held this November. Jockeying for position has already begun, as have predictions about which Party will control Congress for the second half of Biden’s Presidency.

Given the effect of the pandemic, it is close to impossible to decide how well Biden has done but the fact that his Presidency appears to be flying by, while Trump’s appeared to drag on forever, must say something.

The weekly jobless claims data was released yesterday and the headline figure for new claims saw a rise to its highest level in three months.

New claims rose to 286k, following a marginally upwards revised figure of 231k for the previous week. Continuing claims have also risen, to 1631k from 1551k, while the four-week average in new claims, lags a week behind.

While it has been generally welcomed in financial markets, the tightening of monetary policy by the Federal Reserve is unlikely to prove popular with the public as a series of interest rate rises begin most likely in March, although should signs of a slowing economy be seen that could be delayed by a month.

The rise in jobless claims has been laid squarely at the door of the Omicron variant. While it has been a convenient scapegoat, economists fear that there are other factors at play in the employment market.

With two weeks until the January employment report, speculation will grow that the Fed’s decision-making may not be as black and white as it had appeared a couple of months ago,

Yesterday, the dollar index continued its recent move higher. It rose to a high of 95.86 and closed at 95.78. It looks set to move above resistance at 95.80 and possibly challenge stronger resistance at 96.20 in the coming sessions.

Ukraine situation bringing further disagreement

The inflation report for the entire Eurozone showed that headline price increases are still at 5%.

While that may bring a degree of relief to the ECB, it is now well known in the market that for the nineteen individual economies of the Eurozone inflation will be rising in some and abating in others. Until there is more consolidation of fiscal policy, as has been seen in monetary policy, data will be viewed with a degree of scepticism.

Over the twenty years of its existence, the Eurozone managed to avoid any significant political issue that has tested both its unity and its ability to act with one voice.

The massing of Russian troops on its border with Ukraine could easily turn into the first such event. Given her past performance, there is growing concern that EU Commission President Ursula von der Leyen has neither the temperament nor ability to take the lead should a response become necessary.

Yesterday, the Eurozone joined with the UK and U.S. in promising massive costs and severe costs should it act on its clear and present threat.

However, there is already disagreement within the EU of what will trigger such action.

Several nations do not see false flag operations or a cyberattack on Kiev as meeting the criteria. Some states want such hybrid actions to be included, while others are vehemently opposed.

An informal meeting held in France last weekend found a clear divergence. It could happen that Brussels is trying to formulate a response while action, on the ground, is actually taking place.

The statement following this meeting appeared to believe that agreement on the fact that there will need to be a response is sufficient for now.

The effect of a conflict in Ukraine could lead to further damage to the economy highlighting division rather than the unity that the whole premise of the Eurozone was supposed to be built around.

Today, data for consumer confidence will be released and the seemingly continual increase in energy prices as winter begins to bite will see confidence fall.

Yesterday, the Euro fell to a low of 1.1303, where it closed. This followed a rise to a high of 1.1369 earlier in the day.