Category Archives: Recession

The chairman of NatWest understands the problems facing the UK – why can’t Rishi Sunak?

Rishi Sunak: the economy is beyond the understanding of this former Chancellor of the Exchequer, who is now the UK’s prime minister.

This Writer is guilty of terrible omissions in my political viewing habits; I keep forgetting Robert Peston’s interview show.

This week, he was talking to Howard Davies, chairman of NatWest, along with Labour’s John McDonnell and Ruth Davidson of the Conservatives, and it was Mr Davies who proved most interesting.

He laid into former PM Liz Truss, who has claimed she was brought down by a mythical “left-wing establishment”:

His words were supported by Mr McDonnell, who explained how he had planned for a future Labour government in 2017 and 2019 by liaising with the relevant economic movers and shakers in order to be sure that everybody knew what he was planning. He considered Truss’s failure to prepare as “incompetent”:

Mr Davies also described the economic levers that he believed were tipping the UK into recession – including Brexit, despite Tory claims to the contrary:

And he said although the recession was likely to be shallow, it would be hard to bring it to an end because the government has no plans to do so:

This is unsurprising. If a government refuses to accept the reasons for recession (like Brexit), then it is unlikely to be able to plan a successful way out.

But that leaves the question: if Howard Davies can recognise the problems, why can’t Rishi Sunak?

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Interest rates rise again – are the banks deliberately prolonging recession?

The Bank of England has put interest rates up again – claiming that this is an attempt to fight inflation.

But inflation caused domestically – within the UK – is much lower than the 10.7 per cent rate that has been announced during the week, and falling (from 6.5 per cent to 6.3 per cent).

The higher rate is caused by price increases that cannot be changed by interest rate rises within the UK; we simply have to wait for these prices to drop. They are the result of political decisions to put the UK at the mercy of foreign businesses and influences.

Let’s have an example of mainstream media reporting on this:

And now the view from one of our favourite political economists:

Yes, that’s right. The inflation we’re suffering will be unaffected by UK interest rate rises.

All this decision will do is create further hardship for homeowners and small businesses, and prolong the recession that stupid Tory political decisions have caused.

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If this is why the Bank of England is making the UK recession worse, it stinks

The Bank of England: it is not your friend.

One of the strangenesses of running a political website as a commercial endeavour is that one is reliant on the articles to pull in advertising revenue, and this means more popular items take priority.

More meaningful items then take a back seat until such time as they can be funded by the other material – but fortunately, today, lots of people are enjoying the Suella De Vil song, so I have an opportunity to look at why the Bank of England is hiking interest rates and worsening the UK recession.

I’m taking the information from Professor Simon Wren-Lewis’s Mainly Macro article (link below), which suggests the most likely reason I’ve seen so far – and it isn’t to stop energy price inflation, nor is it to stop food price inflation.

No – it’s to stop wage inflation. The aim is to impoverish you by increasing the difference between what things cost and what you can afford.

Here’s Prof Wren-Lewis:

A UK recession will do almost nothing to bring energy and food prices down. Instead what has worried the Bank for some time is that the UK labour market appears pretty tight, with low unemployment and high vacancies, and that this tight labour market is leading to wage settlements that are inconsistent with the Bank’s inflation target.

You can see the reasoning behind this, just with the forthcoming strike by the Royal College of Nursing, that is calling for a 17 per cent pay increase. The Bank’s inflation target is just two per cent, and has been for many years.

The article continues:

Earnings growth is around 7.5% in the wholesale, retail, hotels and restaurants sector, about around 6% in finance and business services and the private sector as a whole.

Domestic firms are under no obligation to compensate their employees for high energy and food prices, over which they have little control and which are not raising their profits. As a result, if firms were free to choose and there was abundant availability of labour, they would offer pay increases no higher than the increases we saw during 2019.

Average private sector earnings running at around 6% are not a problem for the Bank because it is anti-labour, but because it believes wage growth at that level is inconsistent with its inflation target of 2%… Earnings growth will slow as the UK recession bites.

What this means in layperson’s terms is that, by increasing interest rates, the Bank intends to make it harder for many firms to survive in the hope that they will lay off staff, forcing more people back onto the labour market.

Then, firms would be able to offer whatever wages they wanted (above the minimum, of course) on a take-it-or-leave-it basis, and if you couldn’t make ends meet, then that would be your problem.

It is a premeditated, deliberate attempt to worsen poverty for millions upon millions of UK residents.

I wonder whether this is another unintended consequence of Brexit? When the UK was obligated to accept workers from the European Union, employers benefited from exactly the kind of loose labour market that allowed them to offer subsistence, or lower-than-subsistence, wages.

Now those workers have gone and employers are forced to take on native workers, the pendulum has swung the other way. It’s a thought, isn’t it?

Prof Wren-Lewis goes on to explain that developments in economic thinking mean that the tight labour market should not require an interest rate hike to “correct” it (his word).

nowadays macroeconomists believe it is possible to end a boom [in this case an over tight labour market] and bring inflation down without creating a downturn or recession, because once the boom is brought to an end a credible inflation target will ensure wage inflation and profit margins adapt to be consistent with that target.

The lags in the economic system mean a central bank should stop raising rates while inflation is still increasing. If a central bank believes it will lose credibility by doing this, and feels it has to continue raising rates until inflation starts falling, this will lead to substantial monetary policy overkill and an unnecessary recession.

If that is why central banks in the UK and the Euro area keep raising interest rates as the economy enters a recession, then the truth is central banks are throwing away a key advantage of a credible inflation target. Credibility is not something you constantly have to affirm by being seen to do something, but something you can use to produce better outcomes. Furthermore central banks are more likely to lose rather than gain credibility by causing an unnecessary recession.

Of course raising interest rates to 3% is not enough on its own to cause a prolonged recession. Probably more important is the cut to real incomes generated by higher energy and food prices, which is enough on its own to generate a recession. On top of that we have a restrictive fiscal policy involving tax increases and failing public services. Both together should be more than enough to correct a tight labour market. To have higher interest rates adding to these already large deflationary pressures seems at best very risky, and at worst extremely foolish.

This will affect you all.

Sadly, as I indicated at the top of the article, only a few of you are likely even to have read any of the information here – certainly not to the end. So very few of you are likely to make any preparations for it.

For the rest, the next few years are going to be very difficult indeed.

Source: mainly macro: Why is the Bank of England making the expected UK recession worse?

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Interest rate rise will affect YOU. Read this to understand how

The bank of England has just imposed the biggest interest rate rise in a generation – increasing the base rate to three per cent.

There’s no reason for it. The inflation we’re facing isn’t caused by any reasons that an interest rate rise can combat – and energy prices are falling back to normal levels. The hike in interest rates will not affect the cost-of-living crisis in any way.

Instead, it will prolong the recession that the Bank of England has already said will be the worst in many years – if not the worst ever:

And this will affect you – as Martin Lewis explained on Good Morning Britain:

Buckle up, buttercup! It’s going to be a long, hard winter – because the bankers (who, by the way, have had their ability to give themselves unlimited bonuses restored by the Tories) want you to suffer.

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Liz Truss and her 2.5% economic growth target: jam tomorrow?

Liz Truss and Kwasi Kwarteng have been laying out their stall, and pride of place has gone to their claim that they will create consistent economic growth of 2.5 per cent before the next general election.

This would appear to be an impossible dream, as the Bank of England – whose recent forecasts have all been over-optimistic – is predicting a recession lasting to the end of 2023 (that’s six quarters of negative economic growth).

The best Truss can hope for is an improvement after then, which is unlikely to turn into consistent 2.5 per cent growth – certainly not by the time of an election in late 2024.

And Labour would naturally compare the economy at that time with its condition when she took over – negatively.

Looking forward, the prediction is that Truss will do what Tories always do – say Labour would wreck everything and that if we just vote “Conservative” one more time, we’ll all see the benefits.

Here’s a video clip to explain it all further:

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Tax cuts proposed by both Truss and Sunak are unfunded. How are they affordable?

Grinning idiots: the tax cuts both Rishi Sunak and Liz Truss have promised will worsen the cost of living crisis and make it impossible for them to fund relief measures for struggling families, a leading think tank has said.

Oh dear, oh dear, it looks like neither Liz Truss nor Rishi Sunak have bothered to think how they will make their tax cuts work.

The politically-independent Institute for Fiscal Studies has said large, permanent tax cuts could make some spending unaffordable as the UK slips into the recession that Tory policies have triggered.

The claim seems to be based on a discredited economic model that says our taxes pay for public spending, meaning if taxes are cut, equivalent cuts must be made in spending.

That’s not true; governments spend according to their priorities and then borrow from the private sector and/or tax appropriately in order to prevent inflation from exceeding targets they have set.

In this case, the end result is the same: if Sunak or Truss is to cut taxes, spending will have to come down or inflation will rise above even the current high level.

And Carl Emmerson, deputy director of the IFS, warned that spending will probably have to increase if the government intends to support families that will not be able to cope with the increasing cost of living and sky-high energy bills.

Truss has pledged to scrap April’s National Insurance rise to help households and cancel a planned rise in corporation tax, while Sunak as promised to reduce VAT on domestic energy bills from five per cent to nothing, and to cut 3p off income tax by late 2029.

Neither has explained how they will deliver this cuts without adding to inflation, although Sunak has said he will not implement his plan until the current inflation crisis has been brought under control.

So it seems they have been building castles in the air, rather than taking the grounded outlook on the economy that the UK needs. It is impossible to bankrupt an economy like ours, that can create its own money – but it seems both Tory candidates are going to try.

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FOOD drives double-digit inflation figure as Tory UK plummets into recession

Inflation has hit double figures for the first time in 40 years – and this time the driver is not energy bills but the cost of staple food products.

It has soared to 10.1 per cent due to a 12 per cent increase in the cost of what most people consider staples: bread, cereal, eggs, milk and cheese. The increase in these items’ prices was three times that of their nearest rival.

The UK is currently in a “calm before the storm” moment as we await a rise of around 80 per cent in the energy price cap in October.

A drought now sweeping Europe is expected to make matters even worse, affecting trade and crop yields to push food prices up even further.

Ultimately, inflation is expected to peak at 13 per cent or more, meaning people will no longer have money to spend in the economy because their earnings will not cover the amount they will be asked to spend on necessities: housing (mortgage or rent), food, water, and power.

Without that spending, the economy will contract, and a recession lasting more than a year is currently being predicted in which many people are likely to lose their jobs – compounding the crisis even further.

These are all outcomes that the UK’s Conservative government has created.

The rise in food prices is a consequence of Brexit and increased border controls that the Tories fuelled.

The energy crisis has happened because the Tories pandered to donors from the fossil fuel industry rather than investing in green energy, generated within this country. Energy is also a natural monopoly that should never have been privatised by Margaret Thatcher.

And the water crisis is a consequence of privatising that natural monopoly. Instead of investing in improving infrastructure, greedy executives have maximised their profits with large dividend payouts, bolstered by the sale of reservoirs to foreign firms.

Both the privatised energy and water systems are majority-owned by businesses based abroad, many of them wholly-owned by foreign governments.

Or so it seems to This Writer.

Worse is the fact that the Tories are determined to deny that they did anything wrong.

And they’re absolutely refusing to accept the urgent need to re-nationalise these privatised utilities that have failed us all so badly; they are cash cows for Tory donors and the party likes their cash.

Sadly, it’s a myopic, short-term view. The economy will collapse because of it.

Source: Double-digit inflation marks another grim milestone as recession looms

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Interest rate rise will hit your wallet hard and cause a deep economic recession

The Bank of England: its interest rate rise will hit you hard in the wallet.

The Bank of England has increased interest rates by a huge (for these times) 0.5 per cent in an apparently inexplicable move that won’t do anything to stop the current enormous increases in the cost of living.

What can possibly have possessed the Monetary Policy Committee at Threadneedle Street to do this monstrous thing?

The bank’s own forecasters are predicting that inflation will remain above 10 per cent until at least October 2023, putting huge pressures on ordinary people.

The bank is already predicting that the UK will fall into recession this year, and the interest rate rise will prolong it – so that, in three years’ time (after the next general election, take note), unemployment is expected to stand at six per cent of the workforce – and rising.

Energy prices – the main cause of the cost-of-living crisis – are expected to fall back during this period, although the predictions don’t take this into account. The hike in interest rates will not reduce the cost-of-living crisis in any way.

And the ultimate result, as Professor Simon Wren-Lewis points out in his latest Mainly Macro article, will be to reduce inflation to a point far lower than the Bank of England’s two-per-cent mandate permits. Who benefits from that?

Professor Wren-Lewis adds that it is possible the bank expects a new Tory prime minister – whoever that may be – to introduce support for people on low incomes in a bid to stop the excessive inflation and recession.

But there is no indication from either Liz Truss or Rishi Sunak that they will do that; tax cuts promised by Truss will go to rich people and/or corporations.

And, as Professor Wren-Lewis points out,

Excessive monetary tightening based on a guess of fiscal loosening is a dangerous game to play.

Sadly for most of us, the danger applies only to the poor, working people who actually keep the economy moving.

Source: mainly macro: Why does the Bank of England appear to be ignoring its mandate?

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Why is the Bank of England trying to stop us spending when we’re already doing that?

The Bank of England: it seems, behind this imposing facade, there lurks a circus complete with clowns.

It seems the economists at the Bank of England don’t have much of a clue.

They say they have raised interest rates to make it more expensive for consumers and businesses to borrow, so people start spending less, helping cool demand for goods and services and, in turn, slowing the pace of price rises; it’s a bid to curb inflation.

But people are already reining in their spending, because of inflation!

So the interest rate increase is pointless. Right?

Furthermore, as people are choosing to save (where they can), rather than spend, the growth of the economy is slowing – which is what the interest rate rise aims to do anyway. So it isn’t needed.

In fact, it may throw the economy into reverse, sending us into a recession.

And economists have warned that increases in interest rates may have little effect given rising global oil and gas prices, over which domestic changes can have little effect.

So there seems to be only one possible reason for the Bank’s decision:

Insanity.

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UK is heading into recession – probably – as your savings run down

Consumer confidence has fallen off a cliff: will spending do the same – and, if so, will the UK economy go into reverse at the worst possible moment?

Be careful with those savings you racked up during the Covid-19 lockdowns, because you’re going to need them to ride out the cost of living crisis!

That’s the message, as far as This Writer can tell, from economist Simon Wren-Lewis on his Mainly Macro blog – and it’s as close to a prediction that the UK is going into recession as you’re likely to see.

Most economic forecasters aren’t saying it because they’re afraid to, it seems.

We know we’re looking at the biggest fall in living standards since records began in 1956-7, because of Brexit-fuelled increases in the cost of goods (including food), rising energy bills and the largest number of tax rises to be inflicted on a UK population in around 40 years.

You will be expected to use your savings to cushion this blow.

That’s fine – as long as you can be sure that the cost-of-living crisis will be only a short-term shock. But there’s no evidence that this is the case; the effects of Brexit are expected to last for decades, we’re being told to brace for another energy bill shock in October, and the Tories have absolutely no intention of reducing taxes – they want to squeeze you until your pips squeak.

With these expectations in mind, consumer confidence is flatlining:

“The GfK Consumer Confidence Index fell for the fourth month in a row to -31 from -26 in February, its lowest since November 2020, deep in the coronavirus pandemic. Readings of -30 and below have presaged recession on four out of five occasions since the survey started in 1974.” Since then the March data is available, and it’s at -38!

That’s the weakest consumer confidence since the 2008 financial crisis, and weaker than at any time during the height of the Covid-19 pandemic.

So it seems likely that spending will tail off as the year progresses, people see how the cost-of-living shocks affect their savings, and improvements in their financial position fail to appear.

As spending tails off, the economy will falter. And the Tory government has already told us it does not have any plan to stimulate growth with an injection of public cash.

So, even if you have a well-stuffed savings account now, expect those funds to run low by the end of the year, while bills and taxes remain high. What are you going to do then?

Source: mainly macro: Is the UK heading for a recession?

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