Economy is almost certainly in recession and the picture ahead is murky
Let’s start with what we do know.
The economy is now almost certainly in recession. It will not be pleasant. This is a recession which will be felt in most households’ pockets – both through the rise in energy prices and shop prices and the rise in the cost of borrowing.
And when it comes to the cost of borrowing, things are certainly getting tougher. Today the Bank of England raised its official interest rates by 0.75 percentage points, meaning if you’re on a floating rate loan tied to Bank rate the increase will be immediately reflected in your monthly repayments.
In a sense, the Bank is merely doing what most people had expected and what markets had already priced in: in other words, the current fixed rate loans out there on the market already assumed something like this happening.
Remember that point: we’ll come back to it.
So we know the economy is in recession. We know prices are very high and times are looking tough – especially if you have a mortgage which needs to be re-fixed soon. But here’s where the certainty ends and the murkiness begins.
Normally the Bank of England produces one main forecast in its Monetary Policy Report – the quarterly document in which it gives its sense of the state of the economy. But this time around it did something unusual: it produced two, and gave quite a lot of prominence to both of them.
A money market rollercoaster
Why? Well, it comes back to the fact that money markets have been on a rollercoaster recently. As you’ll recall if you’ve followed the ride, in the wake of the mini-budget, expectations for where the Bank’s interest rate was going next year leapt up to over 6%. Since Liz Truss‘s exit, those expected rates have begun to fall, to the extent that as of this week they were expecting a peak of 4.75%. That’s a big change.
And these numbers matter enormously: the higher the rates, the more households who will struggle to make their repayments and the tougher life will get for businesses, many of which will struggle to operate. So even a change of a few fractions of a percentage point will make a big difference.
Eight successive quarters of contraction
That brings us back to the Bank’s latest forecasts. It has to base those forecasts for the state of the economy off an assumption of what’s happening to those interest rates. So it typically takes a two week “snapshot” of what money markets expect for borrowing rates and then builds a forecast around it.
Normally that’s a pretty uncontroversial exercise, but not this time. Because as we all know, those rates were all over the place following the mini-budget and the ensuing gilt market meltdown.
The upshot is that the Bank’s central forecast – the one we usually look at – is particularly bad.
It involves eight successive quarters of contraction: that would be the single longest recession since comparable records began in the early 20th century – though it would be much less deep than nearly all of those downturns. It would see the economy shrink by nearly 3% and unemployment get up to 6.5%.
But here’s the thing: that forecast is based on market expectations that Bank rate would get up to 5.25% next year. And the Bank is unusually explicit today that it thinks that is very unlikely. So that recession forecast is a little bit of a chimera: it is based on a scenario which will probably not happen.
So here’s where that other forecast comes in.
The Bank produced a separate set of figures which ignore all that market mayhem and just imagine rates stay where they are, as of this afternoon, at 3% in perpetuity.
On the basis of that forecast, there is still a recession, but it is barely more than half the depth of its central forecast and doesn’t last half as long. Unemployment doesn’t peak as high. Household income isn’t quite as badly hit. It’s tough, but not awful.
More rate rises
So: is that forecast a more reliable picture of the impending months? Well, not necessarily, for two reasons.
First, the Bank said explicitly today that it thinks it will have to raise interest rates again, albeit not as high as markets were expecting a few weeks ago.
What that means is anyone’s guess, but the signal is that they might not even have to rise as high as the 4.75% markets are currently pricing in. But that does mean a slightly worse outlook.
Second, the Bank’s forecast doesn’t make any assumptions about what the government’s Autumn Statement is going to do to the economy. And given everyone expects the government to cut spending and/or raise taxes, it’s a fair assumption that that could also bear down on economic activity.
It’s complicated
So, as you can see: it’s complicated. I know that’s not especially helpful if you’re after a quick summary. But it’s a fairer reflection of where we are.
The UK is in recession, but it’s worth being a little wary of the more lurid headlines out there about how it’s the “longest in history”. The Bank is saying that’s a possibility if rates went higher (and it doesn’t currently think they will).
But there is another interesting thing going on here, which comes back to that point I made at the start – that when the Bank moves its rates it is, in a sense, reflecting what people out there in the market are expecting it to do. Those expectations matter – and the Bank can often influence them itself.
Today’s Monetary Policy Report contains some pretty heavy hints that the market has overshot its expectations about where Bank rate will go in the future. In other words, the report itself could plausibly persuade investors to notch down their expectations for where interest rates are heading next year.
If that happened, we would be left with an interesting paradox: that even as it raises interest rates even more than it has ever done since it became independent in 1997, the Bank could actually push down what markets expect that eventual peak to be.
In other words, this interest rate increase could be reducing the real-life cost of borrowing in the mortgage markets. Fixed rate loans could get cheaper as a result of today’s events, not more expensive.
Perhaps that sounds topsy-turvy, but then it’s no more weird than many of the other turns of this rollercoaster in recent weeks.
Jaguar Land Rover (JLR) has announced efforts to help its supply chain and a partial restart of operations following August’s crippling cyber attack.
The company said “qualifying” supplier companies would be eligible for early payments due to the disruption caused by the temporary shutdown of its factories over a month ago.
At the same time, it said the phased restart of its manufacturing sites would begin at its Electric Propulsion Manufacturing Centre and its Battery Assembly Centre in the West Midlands from Wednesday.
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“JLR colleagues will also begin to return on Wednesday to the company’s stamping operations in Castle Bromwich, Halewood and Solihull, UK, and other key areas of its Solihull vehicle production plant, such as its body shop, paint shop and its Logistics Operations Centre, which feeds parts to JLR’s global manufacturing sites,” a statement said.
The prospect of production staff getting back to work will come as a huge relief to workers and suppliers alike. The shutdown is currently into its sixth week, costing JLR at least £5m a day.
Companies which supply JLR both directly and indirectly have suffered, though the carmaker is understood to have met its financial commitments to all partners it deals with.
Firms further down the chain complained last week that they were yet to receive any support, despite the offer of a £1.5bn loan guarantee by the government.
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Inside factory affected by Jaguar Land Rover shutdown
JLR is believed to have not signed up to it on the grounds it has had sufficient funds to pay its way to date.
The new early payments scheme is only open to its main, so-called tier one, suppliers.
It is hoped that money will trickle down from them to their own customers who have, in many cases, laid off staff.
The carmaker said of the help now on offer to suppliers: “Qualifying JLR suppliers will be paid much faster than under their standard payment terms, aiding their cashflow in the near term.
“Following an initial phase with qualifying JLR suppliers critical to the restart of production, the scheme will be expanded, including to some non‑production suppliers.
“Working with a banking partner, this short‑term financing scheme means qualifying JLR suppliers will receive a majority prepayment shortly after the point of order and a final true‑up payment on receipt of invoice.
“JLR’s typical supplier payment terms are 60 days post invoice, so this scheme accelerates payments by as much as 120 days. JLR will reimburse the financing costs for those JLR suppliers who use the scheme during the restart phase, as the company returns to full production.”
JLR said that the non-production suppliers who could be offered help later included caterers and consultants.
JLR chief executive, Adrian Mardell, said: “This week marks an important moment for JLR and all our stakeholders as we now restart our manufacturing operations following the cyber incident.
“From tomorrow, we will welcome back our colleagues at our engine production plant in Wolverhampton, shortly followed by our colleagues making our world-class cars at Nitra and Solihull.
“Our suppliers are central to our success, and today we are launching a new financing arrangement that will enable us to pay our suppliers early, using the strength of our balance sheet to support their cashflows.
“I would like to thank everyone connected to JLR for their commitment, hard work and endeavour in recent weeks to bring us to this moment. We know there is much more to do but our recovery is firmly underway.”
Ineos, the chemicals group founded by Manchester United co-owner Sir Jim Ratcliffe, has hit out at the government after cutting a fifth of the workforce at a factory in Hull.
The company said 60 skilled jobs were going at the Acetyls factory “as a direct result of sky-high energy costs and anti-competitive trade practices, as importers ‘dump’ product into the UK and European markets”.
It called on the UK government and European Commission to impose trade tariffs on China, complaining that a lack of action to date had resulted in “dirt cheap” carbon-heavy imports flooding the market, making its products uncompetitive.
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Ineos said the US had protected its manufacturing base through effective tariffs and warned that further jobs would be lost across Europe unless the authorities followed suit.
The company, founded by Sir Jim in 1998, is Europe’s largest producer of essential chemicals for a range of products including aspirin and paracetamol, adhesives and industrial coatings.
It recently invested £30m to switch its Hull plant energy source from natural gas to hydrogen. Ineos claimed Chinese competitors were emitting up to eight times more carbon dioxide than its UK operations.
The Saltend plant in Hull. Pic: Ineos
“This is a textbook case of the UK and Europe sleepwalking into deindustrialisation,” the firm’s statement said.
“Ineos has invested heavily at Hull to cut CO₂, yet we’re being undercut by China and the US while left wide open by a complete absence of tariff protection.
“If governments don’t act now on energy, carbon and trade, we will keep losing factories, skills and jobs. And once these plants shut, they never come back.”
A Government spokesperson responded: “We know this is a tough time for our chemicals industry, who are paying the fossil fuel penalty, with wholesale gas costs remaining 75% above their levels before Russia invaded Ukraine.
“Our modern Industrial Strategy is slashing electricity costs by up to 25% for sectors including chemicals, and the UK’s independent Trade Remedies Authority has the power to investigate the impact of cheap imports if requested by industry.
“We recognise this will be difficult for affected workers and their families, and we continue to engage with Ineos and the wider sector to explore potential solutions that will ensure a viable chemicals industry in the UK.”
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