(G)Rate Expectations
01 February 2022
When the investment strategy has been long-term value creation and share-price appreciation, could it change?
5 min read
01 Feb 2022
The government’s finances continue to be stronger than forecast, mainly thanks to higher tax receipts than expected. Public Sector Net Borrowing was £16.8bn in December 2021, lower than the consensus estimate of £18.5bn, with downward revisions to past months’ borrowing requirements. Tax receipts running £6.2bn ahead of the previous December is evidence of a strong employment market, and expenditure was helped by the ending of furlough schemes.
Opposed to those forces was a higher interest bill thanks to the increased cost of index-linked payments on gilts. The UK is the world’s largest issuer of such instruments as a percent of its total debt. The outlook for the fiscal year to April 2022 now suggests total borrowing of around £170bn, well below the Office of Budget Responsibility’s prediction of £183bn. One outstanding unknown is the cost of mitigating the expected sharp rise in consumer energy bills when the price cap is lifted in April 2022, if the government chooses that course of action, which will be tempting ahead of May’s local government elections. A postponement of the 1.25p increase in employees’ National Insurance contributions seems to have been ruled out.
GDP grew by an annualised 6.9% in the fourth quarter of 2021, well above the expected rate of 5.5% (remembering that the difference does not look quite as spectacular when the numbers are divided by four). Consumption (+3.3%) was slightly disappointing, with the bulk of the beat coming from a rebuilding of inventories, notably by car dealers. Omicron and a reversal of inventory effects suggest a much more subdued first quarter in 2022, but Investec Economics is still forecasting growth of 3.9% for the whole year. With so much focus on rising prices, there was no great alarm sounded by the Personal Consumer Expenditure Core Deflator reading of inflation, which ticked up from 4.7% to 4.9%, nor by the five-to-ten year inflation expectations measure in the University of Michigan Sentiment Survey, which was unchanged at 3.1%. The Fed would like to see these heading lower soon before wage demands begin to increase further. On that front, the 1% quarter-on-quarter rise in the Employment Cost Index came in slightly below expectations, which will have provided some relief for now.
Preliminary estimates of GDP growth in the Euro area came in at +0.3% quarter-on-quarter for the fourth quarter of 2021, a deceleration from the previous two quarters, with the Delta and Omicron variants being factors. Amongst the larger member states there was a mixed performance. France and Spain reported stronger than expected growth at +0.7% and +2.0% respectively, while the Euro area’s largest economy Germany posted a weaker than expected 0.7% contraction. These figures cap off a robust recovery in 2021, with the pre-pandemic level of GDP now having been recouped. Looking ahead, the first quarter of 2022 will be further affected by Covid, and there is still some uncertainty about energy prices. Investec Economics has pencilled in growth of 4.4% for the year, notably above the forecast rate for the US.
The latest PMI surveys suggested that growth continues to be sluggish. This comes as we head into Chinese New Year and the Beijing Winter Olympics, which are bound to disrupt the data for the next month or so. The Manufacturing Index hovers barely in expansion territory at 50.1 with Services slightly more robust at 51.1. The separate Caixin Manufacturing survey actually dipped below 50 to 49.1. This is survey is often give more weight owing to the fact that is a private rather than government-compiled survey. Industrial profits have reflected the slowdown and are now growing by just 4.2% year-on-year. None of this is a great surprise, and the authorities are reacting by easing policy.
Source: FactSet
Source: FactSet
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