economic #aGENda 23.08

Our regular roundup of financial news from the last two weeks that's driving the economy

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How bad will a recession be?

Britain is rapidly entering its worst economic crisis since the 1970s, but it is a crisis hardly discussed by the two right-wing Conservative politicians vying for the premiership.

The National Institute of Economic and Social Research (NIESR) and the Bank of England have both pronounced that we are entering a recession that could last for much of next year.

This will serve to aggravate already serious economic, industrial and social problems, with goodness knows how much public unrest. Yet the message from Liz Truss and Rishi Sunak is that what really matters is whether that Conservative nirvana of tax cuts is offered now or later.

Given the manifold examples of the deficiencies of public sector provision, the last thing this country needs is the smaller state and low-tax regime favoured by the Brexiters. Good services have to be paid for.

Meanwhile the Bank, much criticised for having been slow to guard against the onset of an acceleration in inflation, is now piling on the agony. While acknowledging that the main sources of current inflation – rises in energy and food prices aggravated by an economic war declared by Russia – are beyond its control, it has raised interest rates to guard against the possibility of imported inflation setting off a price-wage spiral and making things even worse.

Whether present inflationary circumstances are closely comparable to the 70s, when a price-wage spiral was built into the system, is questionable. These are choppy economic waters, but one thing is certain: the monetary squeeze directed at an attempt to arrest this outburst of inflation will worsen the recession.

Record wage drop

Over the past six months, Britain’s unemployment figures have arguably been the economy’s saving grace.

While the labour market has been extremely tight – with job vacancies reaching their highest level on record – the headline unemployment rate has settled back at record lows, keeping at bay the last factor that often ushers in dreaded ‘stagflation’.

The recent labour market update still shows the unemployment rate sitting below 4% – with data from June alone at just 3.6% – as well as signs that the labour market is loosening, slightly, with the number of job vacancies appearing to have peaked.

But all of this is secondary to the wage horror story playing out in the data. The Office for National Statistics revealed that wages have taken a plunge, falling at the sharpest pace ever seen on record.

Regular pay (minus bonuses) sat at 4.7% between April and June – the highest pay increase in more than a decade, according to the ONS. But after taking inflation into account, this transforms into a 3% fall in real wages.

In other words, workers are getting pay raises; but what would be seen as meaningful hikes in normal times stand no chance in keeping pace with inflation, which is now forecast by the Bank of England to reach a staggering 13% on the year.

Even pay increases aren’t preventing workers from feeling worse off. This news about the sharpest wage fall on record will serve as yet another reminder that the current plans on the table for getting through the upcoming winter are not going to cut it — especially for the most vulnerable households.

It’s been a dawning reality for leadership hopefuls Liz Truss and Rishi Sunak over the past few weeks that tinkering with VAT and even substantial tax cuts aren’t going to bandage the effect soaring inflation is having on people’s purchasing power.

Rising energy bills may hurt income more than you expect

Under the current price cap, a kettle costs about 4p to boil. Boiling the kettle three times a day will cost you £17.66 for the first three months of the new price cap.

At the same time, lamps and desktop PCs consume negligible amounts of energy.

The price cap is due to be reviewed again before January following Ofgem’s decision to review the cap every three months instead of six. Analysts predict this will push the average check to more than £4,000.

Charity National Energy Action has urged the government to update its energy bill support package to reflect new projections and ensure that the poorest households are adequately protected this winter, while making a “concerted” effort to make homes more energy efficient and lower bills.

People should definitely be aware of how much they are spending on household appliances to try and use less. But no amount of sparing advice and energy saving advice will solve this crisis.

The savings rate gap

The gap between mortgage and savings rates is growing as high street banks fail to pass on interest rate rises.

Not one of Britain’s nine biggest banks and building societies has raised its easy-access savings rates to match the 1.65 percentage point increase in the Bank Rate since December, according to data firm Moneyfacts.

Barclays has the biggest gap between its mortgage and savings rates. It is easy-access savings rate is still at just 0.01%, but its “standard variable rate” mortgages have been increased by the full 1.65 points since December, in line with Bank Rate rises. Its SVR is now at 5.24%.

Halifax, TSB, Nationwide and Lloyds are all offering the same SVRs, having fully passed on all six of the last Bank Rate rises. Nationwide has the second-largest gap between mortgage and savings rates, with easy-access accounts paying 0.18%.

Lloyds savers are faring only marginally better with returns of 0.2%, while TSB and Halifax are at 0.25%. Santander has the smallest gap between mortgage and savings rates. Its eSaver (Issue 20) account now pays 0.75%, and although it has passed on the full interest rate rise of 1.65% to mortgage borrowers, its SVR is priced at 5%.

HSBC has been the slowest to pass on rising interest rates to its mortgage borrowers, having bumped up its SVR by only 1 percentage point since December.

Mortgage borrowers pay 4.54% now, the lowest rate. So even though savers have been stuck at 0.2%, the bank has the second smallest gap between mortgage and savings rates.

Royal Bank of Scotland and NatWest have the same rates. They have raised SVRs by 1.15 points since December, meaning mortgage borrowers are paying 4.74%, while savers receive 0.2%.

Bank of mum and dad to gift and loan £25bn in the next three years

Gifts and loans from the Bank of Mum & Dad (BOMAD) will total £25 billion over the next three years (2022 – 2024), supporting almost half of all first-time buyer transactions, according to new analysis from property group Savills.

In the three years to 2024, nearly half a million first time buyers (470,000), or almost one in two first time buyers, will get financial help from a parent or other family member, says Savills, as rising house prices put the pressure on those saving for a deposit (of course this may reverse based on last month’s figures, see here).

Lending is expected to have peaked in 2021 when 198,000 first time buyers had family assistance in getting their mortgage, around 49% of all mortgaged first-time buyers, up from 131,000 in 2020 and 136,000 in 2019.

Commentators noted that help from the Bank of Mum and Dad peaked last year as lenders exercised rate increases across high LTV loans. This meant more buyers looking to take their first step onto the housing ladder needed to take advantage of any family support to try and secure a deal at a lower rate. However, as ratios normalise over the course of this year, we can expect family assistance to fall back to levels seen prior to 2021 – at around £8.4bn.

If you are considering making a gift to your children or grandchildren, speak with us about our “Protecting The Deposit” solution.