Finanze® Weekly Roundup - 24/09/2022

Here are this week’s highlights in the UK economy.

The UK could now be in recession. According to a report by The Guardian, the Bank of England (BOE) warned that the country could already be in recession. The BOE expects another 0.1% drop in gross domestic product (GDP) in Q3 2022 after the same decline was reported from April to June. It raised interest rates by 0.5 percentage points, which is the highest since 2008.

Tax cuts will be implemented. In his mini-budget announcement, the Chancellor announced tax reductions in the top 45% rate of income tax, which will benefit 660,000 of the country’s highest earners. Ahead of this, Kwarteng told the media that the 1.25% hike in national insurance that was brought in April will be scrapped to help save households about £330 annually.

Stamp duty threshold raised. Stamp duty cut will be implemented for properties worth up to £250,000. First-time home buyers, on the other hand, stamp duty threshold was raised to £425,000 from the previous £300,000.

Sterling falls to 37-year record low; stocks and bonds also plummet. Sterling slid over 3% after Kwarteng’s announcement. A massive sell-off of bonds followed while the FTSE 100 was down -1.97%, a three-month low of 7,018 points.

Finanze® Foresights:

The notion of falling GDP for two consecutive quarters has been used by the media as an accepted definition for recession. But what Economics 101 has taught us is this is too limited since focusing on GDP alone discounts other indicators that contribute to a slowdown in economic activity. These include a fall in real income, production of goods and services, sales and employment.

It takes careful consideration by the BOE and any other institution to consider a country that is already in recession. In fact, it takes a few months before it declares that recession has already begun since indicators need to be adjusted after the figures are released. This is what happened in the UK in 2012 when the official GDP values were revised. Some economic activities also react differently over a period of time, causing officials to carefully recognise its start only after 10 to 12 months.

But the public often hears serious warnings such as what the BOE announced this week. It remains challenging, however, for any economic group to accurately predict recessions because, as mentioned above, various variables need to be considered. What prompted the BOE to react so soon are some of the country’s worsening indicators: the GDP continues its slump in the coming quarter, a contraction was recorded in the services and manufacturing sectors in August by the S&P Global/CIPS composite purchasing manager’s index, and the economy is still battered by soaring inflation that has reached excessive levels in more than 40 years.

But as to how deep the real impact remains to be seen since the UK government’s intervention and that of the BOE’s are intended to prevent a prolonged recession, shorter than the six months that was recorded during the onset of the pandemic, or the five quarters during the 2008 financial crisis.

Kwarteng’s fiscal solutions indicate the beginning of a long and arduous path to salvaging the UK economy. His goal is to get the country growing at 2.5% in the medium term. However, critics are sceptical of his ambitious plans. Negative investor sentiment was also felt as they dumped bonds swiftly yesterday while the pound slumped deeply against the dollar.

And yes, funding the government’s £72 billion revenue losses due to tax cuts is another issue since a windfall tax is already impossible when Kwarteng echoed Liz Truss’ sentiments during his speech.

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