FKU - Continued Challenges For U.K. Economy
Summary
- The recent announcement to introduce a £2,500 household energy cap takes some pressure off further rises in the short term.
- One in eight households were already struggling to pay their bills.
- Some households have excess savings built up over the last two years, which can help alleviate pressures.
- Energy price caps offer consumers some protection in the short term, and large companies can hedge.
- The large cohort of small- and medium-sized enterprises (SMEs) that have not had the benefit of a price cap are unable to avail of hedging and other similar protection mechanisms.
By Owen Fenton
Even with the announcement of U.K. government intervention in the energy market, pressures on U.K. consumers and businesses continue to build and on multiple fronts.
In early August, the Bank of England believed that inflation could peak at 13% in October. With a further increase in gas prices since that forecast, additional projections from market participants suggested that inflation could peak at much higher levels into 2023. The recent announcement to introduce a £2,500 household energy cap takes some pressure off further rises in the short term, but we remain cautious on the plan’s impact on borrowing, currency and inflation over the medium term
E.ON, a large energy supplier in the U.K., suggested in May that one in eight households were already struggling to pay their bills. While the intervention prevents prices from increasing aggressively, the cap is still at a higher level than in May. Also, higher energy prices are not the only items pressuring consumer budgets. A recent Joseph Roundtree publication estimated that the cost of the most basic standard of living had increased by 20%, with increases across all forms of necessary spending.
These fears and pressures have built up for some months now and are likely to have played a role in driving the extremely adverse UK consumer confidence reading, which is now at its lowest point since accurate tracking began in the early ‘80s - at least a 40-year low.
Some households have excess savings built up over the last two years, which can help alleviate pressures. The overall U.K. savings rate spiked to 14% in 2020 and remained elevated in 2021. However, this masks large discrepancies across the population, with some research suggesting that savings for the lower two quartiles either decreased or, at best, didn’t increase.
While energy price caps offer consumers some protection in the short term, and large companies can hedge, we remain cognizant of the large cohort of small- and medium-sized enterprises (SMEs) that have not had the benefit of a price cap and are unable to avail of hedging and other similar protection mechanisms. Details remain sparse, but the government announcement has suggested that there will also be some help for businesses for six months.
Such assistance is important, with SMEs making up three-fifths of employment in the U.K. private sector or about 16.3 million people. Without help or if they are unable to capture higher costs through price increases (likely to be challenging in the face of demand weakness), business closures and unemployment are also likely to worsen. For larger companies - investible and active in capital markets - the fear is that this puts further pressure on their own supply chain and input costs, and/or causes domestic demand conditions to worsen.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Continued Challenges For U.K. Economy