Where do I start?

 

Where do I start?

The energy crisis and its impact on UK households has dominated headlines recently, as it has added to the squeeze on consumer spending. An energy crisis risks turning into a national crisis, without urgent and appropriate action from Liz Truss’s new Government.

Businesses, investors and consumers have understandably become more cautious. Businesses have seen inflationary cost pressures from raw materials and goods to wages. However, like households, small traders are now facing a massive hike in energy costs. Unlike bigger peers who are able to employ hedging strategies to defer some of the pain, smaller traders are fully exposed. Bulb was one of 29 suppliers to have collapsed since the start of the energy crisis. The collapse may now cost taxpayers as much as £4bn, and could also add more than £150 to energy bills.

Smaller businesses are now facing a cost of doing business crisis. Commercial energy bills could possibly rise four-fold this autumn compared with 2020. Electricity usually accounts for a much larger share of energy costs for small businesses than gas. The Federation of Small Businesses (FSB) estimate that since February last year a typical company in London with 30kWh annual consumption could expect its annual electricity bill to surge from just over £4,700 to a staggering £21,200. And with it a real risk of many businesses facing collapse.

The FSB has called on Ofgem to intervene and has called for an energy price cap for small traders like households. The British Chambers of Commerce has also lobbied government ministers with a five-point plan to help including temporary cuts to VAT.

Many businesses survived pandemic lockdown, but with massive government support. Without more help it feels as if UK recession could be much more painful. Who’d want to be Liz Truss right now?

Boris Johnson, “I have never been more certain that we will come through this well – and that Britain will emerge stronger and more prosperous the other side”. The clock is ticking to resolve and restore the confidence of the nation and key businesses.

The challenges are many-fold, how will Liz do spinning the plates? Restoring our faith in the economy, the NHS and addressing the current cost of living crisis. To deliver a brighter future.

What have we been watching?

Global markets continued to re-price the implications for earnings growth of central bankers’ determination to defeat inflation. Following comments from Jerome Powell, Chair of the US Federal Reserve (Fed) at Jackson Hole, government bond yields continued to climb. While the focus was initially focused on the Fed, investors are now anticipating more aggressive action from other central banks.

Fierce fighting in the Russian-occupied southerly Kherson region as Ukraine launched a counter offensive. Ukrainian president Volodymyr Zelensky said that American supplied Himars missiles are changing the course of the war against Russia. While Western weapons are disrupting Russian supply lines, it will take something seismic for Ukrainian forces to force out Russia completely. A prolonged bloody stalemate appears increasingly likely as winter approaches unless Ukraine’s offensive provokes a reckless response from Putin. Meanwhile, Russian state-owned Gazprom halted gas supplies to Europe for three days due to maintenance. However, the Nord Stream pipeline will remain shut after detecting an oil leak. No timeline for completion has been offered. This may have been Putin’s response to last week’s sharp fall in European gas prices from the recent record high adding to speculation that gas supplies are being weaponised in response to sanctions. EU gas storage is reported to be at 80%, which is two months ahead of schedule, with France at 90%, and suggesting it could make it through an average winter now.

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Germany’s inflation rose to its highest level in 50-years in August. European inflation hit 9.1% and is projected to rise above 10%. Markets are now pricing in a 66% chance of a 0.75% interest rate hike by the European Central Bank (ECB) in September. In the meantime, European ministers continue to consider special measures in an attempt to limit the impact of gas prices on power prices.

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In the US, the labour market remains hot, but it was only slightly above economists’ expectations – a more muted set of data than the previous month. The unemployment rate rose from 3.5% to 3.7% as more people entered the labour market.

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The Bank of England must be feeling the heat as the ONS has ruled that the £400 discount on energy bills is an increase in household income, not a price reduction so will not lower CPI inflation! UK Gilt yields climbed at a faster pace than other government bonds, with the 10-Year at c.3%. Sterling continues to decline to $1.15 – also not helpful for inflation given the amount of goods the UK imports, although weaker Sterling is helpful for exporters and those with significant overseas earnings. After Liz Truss being announced as the next UK Prime Minister, the focus turns on the costs of funding her pledged spending increases and lower taxes. Estimates suggest a potential £60-70B hole in public finances, which in turn is driving borrowing costs higher.       

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China’s official PMI business activity indicators for August showed the manufacturing sector still contracting with a reading of 49.4, although the services sector expanded modestly to 52.6. Power cuts are still affecting the manufacturing sector while China is still pursuing its zero-tolerance Covid-19 policy and Chengdu, with a population of 16 million, is the latest city to enter lockdown. Drought and lockdowns are holding back China’s economic recovery.

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Brent oil dropped back to $95 on concerns about the global economic outlook and as Iran TV suggested a revival of the nuclear deal had been agreed. However, OPEC and its allies led by Russia have agreed a small oil production cut (100,000 bpd) to bolster prices. OPEC+ also flagged concerns over efforts to create a Russian oil price cap.

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Finally, talking of the energy crisis – a possible taste of things to come? Germany is one of the most exposed countries to Russian gas and is having to reduce energy consumption. From September, all public buildings apart from hospitals are to be heated to a maximum of 19C and heating turned off completely in corridors and entrances. Public monuments and buildings will no longer be lit up and businesses and shops will be banned from being illuminated at night. Let’s hope the UK’s energy cover proves more resilient this winter!

 

Read Last Week’s Alpha Bites – Vertical Farming

 

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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.