Business news 3 October 2022
James Salmon, Operations Director.
Higher rate U-Turn, Oil, UK not in recession after Q2 growth, No OBR assessment of tax plans until November and more business news.
Higher rate U-Turn
Prime Minister Liz Truss and Chancellor Kwarteng have abandoned a plan to abolish the top rate of income tax for the highest earners in an astonishing U-turn. The chancellor acknowledged that their desire to axe the 45% rate on earnings over £150,000 in a move to be paid for by borrowing had become a “distraction” amid widespread criticism.Sterling has strengthened on the news and is at $1.12 US dollars.
Oil
Oil has jumped $3 to $82 on rumours Opec+ is about to announce production cuts.
UK not in recession after Q2 growth
The UK’s economy is not currently in recession, with a revised reading showing growth in Q2. Data from the Office for National Statistics (ONS) shows economic output was up 0.2% between April and June. The revised figure comes after a previous reading pointed to a 0.1% decline. Despite posting growth in Q2, the ONS revealed that the economy is 0.2% smaller than it was before the pandemic, with this downwardly revised from a previous estimate that it is 0.6% bigger. The report said the UK is the only economy among G7 nations yet to rise above the pre-pandemic level seen in Q4 2019. The ONS also believes that the UK economy shrank by 11% in 2020 – the year of the coronavirus outbreak – with this a more severe contraction than the previous estimate of 9.8%. The Bank of England recently warned that the UK could already be in a recession – which is defined as two consecutive quarters of GDP shrinking. The Bank’s recession warning stemmed from a forecast that the economy would shrink by 0.1% in Q3 and came before the ONS revised its Q2 reading.
No OBR assessment of tax plans until November
Prime Minister Liz Truss is resisting calls to bring forward publication of the Office for Budget Responsibility’s (OBR) assessment of the Government’s tax plans. The Treasury has announced that the forecast will be released on November 23, the date Chancellor Kwasi Kwarteng is due to set out further economic plans. The Treasury will receive the OBR’s first draft on October 7, but that will not be made public. There have been calls for the analysis to be published sooner after tax and spending plans set out in Mr Kwarteng’s mini-Budget prompted turmoil in the markets. Liberal Democrat leader Sir Ed Davey says that by waiting until November 23, the Government is allowing the economy to “fly blind” for two months, warning that households and businesses “can’t afford to wait any longer for this government to fix their botched, unfair budget.”
PM admits disruption after tax cut pledges
Prime Minister Liz Truss has admitted that there has been “disruption” in the UK economy following the mini-budget which set out £45bn of tax cuts funded by borrowing. This comes after the fallout of the mini-Budget saw the pound slump and the Bank of England opt to step in to shore up pension funds. Writing in The Sun, the PM insists the Government had “acted decisively” to ease cost of living pressures, noting that her plan “involves difficult decisions and does involve disruption in the short term.” In a separate pooled interview with broadcasters, Ms Truss said: “I recognise there has been disruption but it was really, really important we were able to get help to families as soon as possible.” Backing Chancellor Kwasi Kwarteng’s decision to cut taxes as part of the plan to drive up economic growth, she said: “What is important to me is that we get Britain’s economy back on track, that we keep taxes low, that we encourage investment into our country and that we get through these difficult times.”
EU agrees windfall tax on energy firms
EU ministers have agreed a windfall tax that will target the record profits of energy firms. The plan includes levies on fossil fuel firms’ surplus profits and excess revenues made from surging electricity costs. EU ministers estimate that they can raise €140bn from the charges on non-gas electricity producers and suppliers that are making bigger-than-usual profits from the current demand. European Commission vice-president Frans Timmermans earlier this month said that fossil fuel extractors will be told to give back 33% of their surplus profits for this year. Earlier this week, 15 member states asked the EU to impose a price cap on gas bills to slow the soaring costs.
House price growth slows in September
Figures from Nationwide show that house price growth has slowed for the first time since July 2021. Prices rose by 9.5% in September, marking a slowdown on the 10% increase seen in August. Looking ahead, Martin Beck, chief economic adviser to the EY Item Club, said: “September’s slowdown is likely to be the precursor to a more sizeable weakening in house price growth and housing market activity, reflecting the recent rise in market interest rate expectations and mortgage rates.” Andrew Montlake, managing director at mortgage broker Coreco, has warned that market uncertainty is “off the charts,” saying a brief surge in sentiment caused by the stamp duty announcement in the Chancellor’s mini-Budget “has been wiped out by the tsunami of market volatility since.”
HSBC warns mortgage costs may mean forced sales
HSBC has warned that some homeowners may be forced into sales, with mortgage repayments set to rise by up to £5,000 a year. Mortgage rates had already surged above 4% before last week’s mini-Budget and HSBC says a rise to 5.5% is now an “imminent possibility.” Households coming to the end of a fixed-term deal will soon face increases of around £5,000 a year. Before Chancellor Kwasi Kwarteng set out the Government’s tax and spending plans, analysts were expecting repayments to rise by £3,500. HSBC says higher rates will mean a dip in demand from first-time buyers, with this likely to see prices fall by 3% in 2023 and 1% the year after. Chris Hare, senior economist at HSBC, said: “We are increasingly concerned about the possibility of spiralling mortgage costs leading to a wave of forced sales, triggering a broader, deeper, and more prolonged slump.”
Parents forced to quit jobs due to childcare costs
A poll of 2,000 parents shows that 21% have had to cut down their work days due to an increase in nursery fees, with 7% having to leave work entirely in order to care for their children. The poll commissioned by credit reference service Credit Karma also found that 24% of parents are having to pay an extra £110 a month for childcare. While 38% said the soaring cost of living is making work too great an expense to justify, 35% plan to leave their job next year due to rising childcare costs.
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