The Spring Statement will require hard choices
With public finances stretched and most of the cuts from his previous Budget delayed until 2025 (when they might not be his problem), Jeremy Hunt will have to look at what’s left to trim. The allowances for pensions tax relief – which costs the Treasury £43bn a year – could be reduced, or fuel duty could be raised for the first time since 2011, but whatever the Chancellor does, he will have to answer to an increasingly squeezed middle class. The Autumn Budget was to a certain extent a free ride for Hunt, who was then considered to be stepping in to stabilise an economy damaged by the recklessness of the Liz Truss administration. Next time, he’ll have no one else to blame.
Inflation will fall sharply and then rise again
In her monetary policy statement on 15 December, Christine Lagarde, president of the European Central Bank, warned repeatedly that energy and food prices – the key drivers of high headline inflation in Europe, the US and the UK – “could remain persistently higher than expected”. But some economic indicators say otherwise.
Oil futures – contracts that predict the price of crude oil in the months to come – are below $75 a barrel for the first half of next year, while the UN’s food price index is at a lower level than it was before Russia invaded Ukraine. In bond markets, traders read the future in one-year Treasury Inflation-Protected Securities or Tips: US Treasury securities which are priced against what everyone in the market collectively expects inflation to be in a year’s time. Currently, they are forecasting the steepest decline in inflation since 2008.
This means that some markets are pricing in a sharp fall in the rate of inflation next year, not because governments or central bankers will suddenly solve the problem of rising prices, but because demand will be floored by recession. There’s little disagreement that the UK will enter a recession (measures such as retail sales, consumer confidence and the Purchasing Managers’ Index suggest it already has), but it remains to be seen what shape it will take. Janet Mui, head of market analysis at Brewin Dolphin, says equity prices and bond yields predict a “mild recession”. Albert Edwards, one of the most respected global strategists in banking, recently told me that he would not be surprised if headline inflation in the UK reached zero next year.
This could give the Bank of England, now in a new and more amenable relationship with Jeremy Hunt’s Treasury, the excuse it needs to cut interest rates, abandon the selling-off of its government debt holdings, and even buy some more government bonds to stimulate a flagging economy through yet more quantitative easing. But because policy won’t have done enough to end the underlying “core” inflation, the stage will be set for a second round of inflation in the years to come – which is exactly what happened in the 1970s.
A general strike will become more likely
Strike days have already been announced by rail staff, driving examiners, Environment Agency staff, National Highways workers and others for January, and the TUC’s Frances O’Grady has said that “this wave of strike action will continue into 2023”. A recent Ipsos Mori poll found that 64 per cent of the British public think a general strike will occur this year. Given the state of public finances and the government’s reluctance to negotiate with unions, this isn’t a far-fetched idea.
House prices will fall
The turning point for inflation has already been reached in the UK’s grossly distended housing market. Governments have spent decades encouraging inflation in housing through policies such as Right to Buy and Help to Buy: as a result houses in Britain are less affordable than they have been at any point since the late 19th century, when home ownership was limited to the wealthiest 10 per cent of the (male) population.
Now, however, higher interest rates and bond yields have pushed up the price of a mortgage, and millions of people face paying thousands per year more in higher interest payments, or selling into a market rapidly running out of buyers. Millions of small landlords may also decide to sell up.
Halifax and Lloyds, two of the UK’s biggest mortgage lenders, have predicted an 8 per cent fall in prices; analysts Pantheon Macroeconomics and Capital Economics agree. But history suggests a greater fall is possible. Between 1989 and 1993, UK house prices fell by more than 20 per cent; in London they fell more than 30 per cent.
The government has shown a keen interest in pushing the property crash to the next parliament (Jeremy Hunt has decided the stamp duty threshold will fall about a month before the next general election, for example) and may well intervene with a new policy. (Bribe to Buy? We Beg You To Buy?) The Bank of England could also help by loosening its policies again. But if unemployment rises significantly and the recession is deeper than expected, even current house-price predictions could look optimistic.
Elon Musk will move on from Twitter
Elon Musk has had fun purging Twitter of its most talented staff and alienating its most interesting users, and if he was only CEO of Twitter, he could (as sole director of the company) keep doing that. But Musk wasn’t hired into Twitter because anyone thought he would be good at it. He bought the company, and he was able to do so because of shareholders’ confidence in another business: Tesla. Since Musk entered Twitter HQ on 26 October, Tesla investors have endured losses of 44 per cent (no other large car company has seen a similar decline in value), and they are understandably unhappy.
This is why Musk ran a Twitter poll in December on whether he should continue to lead, and announced that he would appoint a new CEO as soon as he finds “someone foolish enough to take the job”. Almost all of Musk’s wealth comes from Tesla stock, and he needs to rebuild confidence in the company. It’ll be interesting to see if he can.
The world in 2023: read more of our writers’ predictions
Jeremy Cliffe on geopolitics
Katie Stallard on global affairs
Rachel Wearmouth on UK politics
This article was originally published on 2 January 2023.
This article appears in the 04 Jan 2023 issue of the New Statesman, Sunak Under Siege