Economy is almost certainly in recession and the picture ahead is murky

Published

3 years ago

November 5, 2022

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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.

Business

Trade war: Trump reveals first two nations to pay delayed ‘liberation day’ tariffs

Published

5 hours ago

July 7, 2025

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Trade war: Trump reveals first nations to pay delayed 'liberation day' tariffs

Donald Trump has warned that all goods from Japan and South Korea will face tariffs of 25% from 1 August.

The announcement, via his Truth Social platform, marks the restart of the threatened “liberation day” escalation that was paused in April, for 90 days, to allow for negotiations to take place with all US trading partners.

The president showed off copies of letters to the leaders of both Japan and South Korea informing them of the tariff rates. Those duties will come on top of sector-specific tariffs – such as 50% rates covering steel – already in force.

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He warned the rates could be adjusted “upward or downward, depending on our relationship with your country”.

Country-specific tariffs had been due to take effect from Wednesday this week but Mr Trump had earlier revealed that nations would start to get letters instead, setting out the US position.

Duties would take effect from 1 August, without any subsequent deal being agreed, it was announced.

The letters sent to Japan and South Korea cited persistent trade imbalances for the rates and included the sentence: “We invite you to participate in the extraordinary Economy of the United States, the Number One Market in the World, by far.”

He ended both letters by saying, “Thank you for your attention to this matter!”

The European Union – the biggest single US trading partner – is among those set to get a letter in the coming days.

Mr Trump has also threatened an additional 10% tariff on any country aligning itself with the “anti-American policies” of BRICS nations – those are Brazil, Russia, India, China and South Africa and whose members also include Egypt, Ethiopia, Indonesia, Iran and the United Arab Emirates.

The UK, bar a massive shock U-turn, should be exempt.

The country was the first to be granted a trade deal, of sorts, in May and the Trump administration has claimed many others had been offering concessions since the clock ticked down to 9 July.

The UK is not expected to face any changes to its current 10% rate due to the trade truce, which came into effect last week.

While UK-made cars aerospace products face no duties under a new quota arrangement, it still remains to be seen whether 25% tariffs on UK-produced steel and aluminium will be cancelled.

They could, conceivably, even be raised to 50%, as is currently the case for America’s other trading partners, because no agreement on eliminating the rate was reached when the government struck its deal in May.

It all amounts to more uncertainty for the UK steel sector.

A No 10 spokesman said on Monday: “Our work with the US continues to get this deal implemented as soon as possible.

“That will remove the 25% tariff on UK steel and aluminium, making us the only country in the world to have tariffs removed on these products.

“The US agreed to remove tariffs on these products as part of our agreement on 8 May. It reiterated that again at the G7 last month. The discussions continue, and will continue to do so.”

China and Vietnam have also secured some US concessions.

The dollar strengthened but US stock markets lost ground in the wake of the letters to Japan and South Korea being made public, with the broad-based S&P 500 down by 1%.

Stock markets in both Japan and South Korea were closed for the day but US-traded shares of SK Telecom and LG Display were down 7.5% and 5.8% respectively.

Business

Tesla shares sink as Musk launches political party

Published

6 hours ago

July 7, 2025

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Tesla shares sink as Musk launches political party

Shares in Elon Musk’s Tesla have reversed sharply over renewed concerns about his focus on the company’s recovery as he plots against Donald Trump.

Shares in the electric car firm plunged by more than 7% at the start of trading on Wall Street – taking about $71bn (£52bn) off its market value.

The stock has often come under pressure since Musk started his association with the president, latterly helping bring down federal government costs through a new department known as DOGE (Department of Government Efficiency).

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But it is now suffering as their political relationship has soured.

Musk has publicly opposed the so-called “big, beautiful bill” – Mr Trump’s flagship tax cut and spending plans that received Congressional approval last week – since he left his DOGE role.

Musk wrote in a post on his X platform on 30 June: “It is obvious with the insane spending of this bill, which increases the debt ceiling by a record FIVE TRILLION DOLLARS that we live in a one-party country – the PORKY PIG PARTY!!”

Once the bill was passed, he created a poll on X, asking people if they would want him to launch the America Party.

He wrote on 4 July: “Independence Day is the perfect time to ask if you want independence from the two-party (some would say uniparty) system!”

The vote ended with 65.4% in favour of creating the party.

The formation of the America Party was announced the following day.

“By a factor of 2 to 1, you want a new political party and you shall have it! When it comes to bankrupting our country with
waste & graft, we live in a one-party system, not a democracy.”

“Today, the America Party is formed to give you back your freedom,” Musk posted.

Trump responded on his Truth Social account: “I am saddened to watch Elon Musk go completely ‘off the rails,’ essentially becoming a TRAIN WRECK over the past five weeks.

“He even wants to start a Third Political Party, despite the fact that they have never succeeded in the United States –
The System seems not designed for them.”

Trump has previously threatened to go after Tesla‘s government subsidies and contracts through the DOGE department to save “big” as their relationship deteriorated.

Such threats have also pressured the share price at Tesla.

It has suffered throughout Trump 2.0 and, in fact, has trended lower since last December – shortly after Mr Trump’s election win was confirmed.

The possibility of tariff hits to the business, followed by actual tariff disruption, along with a consumer and investor backlash against Musk’s previous DOGE role have contributed to a 35% decline on the December peak.

The very absence of Tesla’s CEO dragged on the shares.

Tesla sales suffered globally as the trade war ramped up due to the imposition of tariffs by a government he supported, until the public row between him and the president began in early June.

Musk had only just renewed his 100% focus on Tesla and his other business interests by that time.

Tesla sales were down during the presidential election campaign last year and continued to decline, on a quarterly basis, during the first half of 2025.

Neil Wilson, UK investor strategist at Saxo Markets, said of the company’s share price woes: “Investors are worried about two things – one is more Trump ire affecting subsidies and the other more importantly is a distracted Musk.

“Investors had cheered Musk stepping back from frontline politics but are now worried he’s going to sucked back in and take his eye off Tesla.”

Business

Post Office scandal: Victims say government’s control of redress schemes should be taken away

Published

18 hours ago

July 7, 2025

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Post Office scandal: Victims say government's control of redress schemes should be taken away

Post Office scandal victims are calling for redress schemes to be taken away from the government completely, ahead of the public inquiry publishing its first findings.

Phase 1, which is due back on Tuesday, will report on the human impact of what happened as well as compensation schemes.

“Take (them) off the government completely,” says Jo Hamilton OBE, a high-profile campaigner and former sub-postmistress, who was convicted of stealing from her branch in 2008.

“It’s like the fox in charge of the hen house,” she adds, “because they were the only shareholders of Post Office“.

“So they’re in it up to their necks… So why should they be in charge of giving us financial redress?”

Jo and others are hoping Sir Wyn Williams, chairman of the public statutory inquiry, will make recommendations for an independent body to take control of redress schemes.

The inquiry has been examining the Post Office scandal which saw more than 700 people wrongfully convicted between 1999 and 2015.

Sub-postmasters were forced to pay back false accounting shortfalls because of the faulty IT system, Horizon.

At the moment, the Department for Business and Trade administers most of the redress schemes including the Horizon Conviction Redress Scheme and the Group Litigation Order (GLO) Scheme.

The Post Office is still responsible for the Horizon Shortfall scheme.

Lee Castleton OBE, another victim of the scandal, was bankrupted in 2007 when he lost his case in the civil courts representing himself against the Post Office.

The civil judgment against him, however, still stands.

“It’s the oddest thing in the world to be an OBE, fighting for justice, while still having the original case standing against me,” he tells Sky News.

While he has received an interim payment he has not applied to a redress scheme.

“The GLO scheme – that’s there on the table for me to do,” he says, “but I know that they would use my original case, still standing against me, in any form of redress.

“So they would still tell me repeatedly that the court found me to be liable and therefore they only acted on the court’s outcome.”

He agrees with other victims who want the inquiry this week to recommend “taking the bad piece out” of redress schemes.

“The bad piece is the company – Post Office Limited,” he continues, “and the government – they need to be outside.

“When somebody goes to court, even if it’s a case against the Department for Business and Trade (DBT), when they go to court DBT do not decide what the outcome is.

“A judge decides, a third party decides, a right-minded individual a fair individual, that’s what needs to happen.”

Mr Castleton is also taking legal action against the Post Office and Fujitsu – the first individual victim to sue the organisations for compensation and “vindication” in court.

“I want to hear why it happened, to hear what I believe to be the truth, to hear what they believe to be the truth and let the judge decide.”

Neil Hudgell, a lawyer for victims, said he expects the first inquiry report this week may be “really rather damning” of the redress claim process describing “inconsistencies”, “bureaucracy” and “delays”.

“The over-lawyeringness of it,” he adds, “the minute analysis, micro-analysis of detail, the inability to give people fully the benefit of doubt.

“All those things I think are going to be part and parcel of what Sir Wynn says about compensation.

“And we would hope, not going to say expect because history’s not great, we would hope it’s a springboard to an acceleration, a meaningful acceleration of that process.”

A Department for Business and Trade spokesperson said they were “grateful” for the inquiry’s work describing “the immeasurable suffering” victims endured.

Their statement continued: “This government has quadrupled the total amount paid to affected postmasters to provide them with full and fair redress, with more than £1bn having now been paid to thousands of claimants.

“We will also continue to work with the Post Office, who have already written to over 24,000 postmasters, to ensure that everyone who may be eligible for redress is given the opportunity to apply for it.”