Pothole Politics

It is estimated that there are over a million potholes on UK roads.

In the Autumn Spending Review of 2020, when Rishi Sunak was Chancellor, he announced £1bn of additional funding to fill in potholes. On the 15^th January 2021 he then heralded ‘enjoy National Pothole Day before they are all gone.’ Will these words come back to haunt him in local elections on Thursday? Labour has been making the pothole issue a key part of its campaign while an electoral backlash is expected from motorists and cyclists.

The Local Government Association which represents local councils, highlights OECD data which shows that spending on local road maintenance in the UK halved between 2006 and 2019, the latest year with comparable data. Ministers have since increased maintenance funding and Rishi Sunak, when he scrapped the northern leg of HS2, said some of the savings would be used to fill road potholes. Some £8.3bn of redirected HS2 funding is being set aside over the next 10 years to fund local road maintenance. However, with a greater number of heavier electric vehicles on our roads and more extreme weather the pothole crisis appears to be getting worse. The AA estimates that pothole damage costs UK drivers nearly £500m a year.

Is the state of the country’s roads a reflection of the UK’s public finances? While Labour will no doubt seek to capitalise upon the pothole crisis, there appears to be no quick fix for whoever is in power. The Asphalt Industry Alliance estimates it would cost over £16bn to tackle the road repair backlog in England and Wales alone. Given the demands for higher defence spending, healthcare, and social care with an ageing population, this sounds a tall order. It looks as if the breakdown services, garages, and cycle repair shops will be kept busy for the foreseeable future.

What have we been watching?

A measure of calm returned to markets last week as direct war between Israel and Iran was averted, although tension within the Middle East remains heightened with Israel preparing an offensive in Rafah. Market focus shifted to the prospect of higher-for-longer interest rates in the US and the possibility of the European Central Bank (ECB) and even the Bank of England cutting interest rates ahead of the Federal Reserve (Fed). The Fed’s preferred inflation measure the core PCE deflator came in marginally higher than expected at 2.8% denting hopes for an early rate cut. All eyes will be on the Fed meeting on Wednesday. Sterling settled around $1.25 which is helpful for exporters and overseas earners which, together with ongoing takeover activity has continued to be supportive of the UK equity market at a time of uncertainty. Indeed, the FTSE 100 hit a record high. 

The impact of the ongoing conflict in the Middle East and attacks on Red Sea shipping is reflected in a 66% decline in shipping volumes through the Suez Canal. We are all going to have to be a bit more patient when buying some imported goods and businesses may need to hold additional stock to maintain service levels. Will more lengthy transit times, greater fuel usage and insurance costs feed into higher prices and inflation?

Are European and Chinese trade relations deteriorating? In the wake of concerns about electric vehicle subsidies and the arrests in Germany suspected of spying for China, the European Commission has raided the offices of Chinese security-equipment supplier Nutech. The company has already been banned by the US on security grounds. The EU is China’s second-largest trading partner and Beijing will be no doubt alarmed by the EU’s attempt to crack down on what it sees as China’s unfair trading practices. Meanwhile, China’s foreign minister urged visiting US Secretary of State Antony Blinken to address rising disagreements or risk a ‘downward spiral’ between the two countries.

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In the UK, the ‘flash’ PMI business activity indicator jumped from 52.8 to 54.0, confounding expectations for a decline and hitting the highest level since last May. While manufacturing continues to look soft, dropping to 49.1, the service sector increased to 54.9. However, input prices have risen within the sector due to the latest National Living Wage increase but competitive pressures have limited the pass-through of costs. Government borrowing in March was higher than expected and the gilts sales target has been increased by £12.4bn for the fiscal year 2024/25 taking the total to £277bn. This is the second largest amount on record. The news comes as the government has committed to increase defence spending to 2.5% of GDP by 2030. This would be funded by civil service job cuts. Labour also intends to increase defence spending postelection but has said this will only be when financial conditions allow it to.

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Eurozone business activity growth accelerated to the highest level in 11 months in April helped by a pick-up in the service sector. The service sector ‘flash’ PMI was 52.9 although manufacturing remained in contraction for the 13-month at 45.6. Whilst the data is encouraging, the concern for the ECB will be pass-through of higher wages in prices within the service sector.

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In the US, ‘flash’ PMI data for April was a little weaker than expected with the manufacturing PMI falling to 49.9 while the service sector PMI was also lower at 50.9. Other economic data was mixed for the inflation debate. US economic growth was weaker than expected in the first quarter at 1.6% against estimates of 2.4%. However, the Fed’s preferred inflation the core PCE deflator was marginally higher than expected at 2.8%.  

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In Japan, business activity touched an 8-month high in April with the manufacturing ‘flash’ PMI at 49.9 and services PMI of 54.6. However, inflation picked up, which was not helped by currency weakness. The Japanese yen fell to a fresh 34-year low against the US Dollar as the Bank of Japan (BoJ) kept its main interest rate unchanged. Inflation slowed to 2% in April but the BoJ has raised its inflation forecast from 2.4% to 2.8%.

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The People’s Bank of China left its one-year loan rate unchanged at 3.25% as expected. The 5-year interest rate which is used to price mortgages was also left unchanged at 3.95%.

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Brent oil edged up to $88 as the situation in the Middle East remains tense.

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Finally, ‘infamy, infamy, they’ve all got it in for me!’ Our shortest-serving PM Liz Truss is still looking to apportion blame for her disastrous Truss-omics policy. While very briefly PM, she considered sacking Bank of England Governor Andrew Bailey as part of her attempt to dismantle the ‘economic establishment.’ Meanwhile, Andrew Bailey is under pressure after an independent report by former Federal Reserve Chair Ben Bernanke highlighted the failings of the Bank of England’s economic modelling. It’s a reminder that the economy is a bit like a football team – you need a good manager and the right tactics to be successful.

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Postscript: Following last week’s Alpha Bites highlighting the risk of China flooding Europe with cheap electric vehicles. The Port of Bristol received its largest shipment of vehicles in a single journey last week -4,694 EVs, the majority of which were Chinese-made MG EVs!

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Read Last Week’s Alpha Bites – Electric Shock

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.