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The war in Iran may, if you believe Donald Trump, soon be over. The US President has said it will last another “two or three weeks”. But the economic consequences will last through the rest of this year and beyond. Indeed, the storm is yet to come, and we have to get through it as best we can. It will not, as our Prime Minister acknowledged yesterday, be easy.
Don’t be misled by the sharp recovery in share prices and the fall in the oil price that took place over Wednesday afternoon. For shares, this is a relief rally; relief, that is, that some sort of end is in sight. That could quickly evaporate if such a judgement proves wrong.
As for oil prices, yes, they dipped briefly below $100 (£75) a barrel, but that is up from $60 (£45) at the beginning of the year and just over $70 (£52.50) at the end of February. The inflationary impact of that is showing at the pumps, but has yet to move through the economy as a whole.
That’s the core of the problem. What we are getting now is a foretaste of the surge in inflation that will come progressively through the summer and autumn. That will be very hard to pull back to the Treasury’s 2 per cent target level here in the UK, as well as in the US and Europe. The cost of oil and gas affects the cost of everything else. Not only are they the largest sources of energy – oil supplies 34 per cent of global primary energy demand, and gas 25 per cent – but they are also vital feedstocks for many other products, including plastics and, notably, fertiliser. The Food and Drink Federation has warned that food prices could rise by 9 per cent this year.
The only real weapon against inflation is higher interest rates. So, hopes of a decline this year have disappeared; the cost of long-term borrowing for the Government has risen sharply; and the markets predict that the next move of rates from the Bank of England (BoE) will be up, not down. The prospect of higher interest rates has already increased mortgage costs and will inevitably dampen down an already soft property market. While house prices across the country as a whole have been broadly stable, roughly 20 per cent of all flats are being sold at a loss.
So what should we do to protect ourselves? Everyone is different and much of the commentary on how to cope is irrelevant or irritating. But the principle that we should use the headwinds as a push to take steps that we probably should have taken anyway is surely a good one. So here are 10 ideas for the average reader to weather difficult times.
One, unemployment will rise. That doesn’t mean you should stick with a job you hate, but be aware that finding another one will be tougher than it has been for more than a decade. For young people, it already is. So, anyone in stable employment should hang in there, but this should be a spur to think about one’s career and employment in a strategic way. What do you really want to do, and how do you put yourself in a position to do it?
Two, leading on from that, what about a side hustle? One in three people in Britain claim to have some form of income aside from their main occupation, earning on average £200 a month. The Royal Mail’s guide to this has all sorts of suggestions, ranging from freelance editing and testing apps and websites to online tutoring. This is not for everyone, but anything that makes us more independent of our principal employer is a bonus in uncertain times.
Three, cutting energy use, of course. We’re coming into the summer, but as British Gas urges, cutting your home’s room temperature to the lowest comfortable level is a sensible thing to do. Bedrooms in particular can be cooler, as this can improve sleep quality.
Four, tax. It might seem a bit late for the current tax year which ends this week, and our tax system is infuriatingly complicated. But that very complexity offers a host of opportunities to cut the bill in a legal and ethical way, and there is no shortage of professional advice on how to do so.
Five, for anyone with a student loan, the interest being charged is so outrageous that it should be a priority to clear the darned thing as soon as possible. It may be that the Government will do something to reduce the burden, but you cannot be confident of that. So finding some way of clearing it should be a top priority. I saw one story of someone who did a chunk of it with a second mortgage on their home and stuck the rest on a credit card – still cheaper than the Retail Price Index plus 3 per cent.
Six, for luxuries, spend money on things that are not liable for VAT rather than things that are heavily taxed. Food is not taxed; alcohol is outrageously so. So for meals at home, go for top-end steak rather than fancy wine.
Seven, when buying or leasing cars, it’s the long-term cost that matters. And when running one, the option of cutting down mileage, hanging onto an old one for another year, finding an insurer that needs the business and can do a better deal – all the standard pieces of advice – matter more now than ever before.
Eight, look after your health. That might seem a strange point to make at a time like this. But a lot of spending money involves activities that are not of themselves particularly healthy, whereas there are cheaper and healthier options. It’s the “walk rather than drive” line of thought. Or maybe, ahem, drink a bit less.
Nine, in a downturn, businesses are under pressure to survive, and I am afraid many won’t. Those that do pull through are open to deals, and that is an opportunity for customers to get goods and services on better terms than in less troubled times.
Finally, we are in this together. So it should be a time when we help each other to keep our costs down, enjoy ourselves in community and family activities and try and make life more fun for everyone. That’s a bit Panglossian to be sure. It was Dr Pangloss in Voltaire’s 1759 satire Candide who asserted that everything would turn out for the best “in the best of all possible worlds”.
Optimism at a time like this is much mocked, and understandably so. But think back to the pandemic. We did learn from that experience. So the idea that good things can emerge from tough times is, I hope, a useful one.
Need to knowOne thing is for sure. This is not going to be as bad as the pandemic, and we can learn from our mistakes then. One was to spray public money around, particularly with the “eat out to help out” scheme, ending up with not only a huge increase to the national debt but also probably to spreading the bug faster than would otherwise have happened.
So unlike some other countries, including Spain and Poland, there won’t be cuts in fuel duty, and support for home heating bills will be targeted towards poorer households.
So while there will be damage to the government’s fiscal position, it will be nothing like the surge in borrowing that happened as a result of the cuts in revenue and the surge in spending then. What worries me is that we have gone into this crisis with much weaker national finances. That is showing up in our elevated cost of funding the deficit, with the yield on 10-year gilts pushing past 4.8 per cent in trading on Wednesday. That is down a whisker from the peak last week of over 5 per cent, but still way higher than the 4.2 per cent at the end of February.
There is a particular funding problem that doesn’t show up in the day-to-day movements in gilt yields, which is the impact of a higher Retail Price Index (RPI) on the amount we have to pay on index-linked gilts. These make up one quarter of the national debt and they are linked to the RPI. If there is a real explosion of inflation in the autumn, this is very bad news for the Treasury.
The other principal concern that I have is employment. There is no point in banging on about the damage to employment from the additional national insurance taxes and the higher living wage. That is done. What I am worried about is the possibility that there is a lagged effect on the job market that hasn’t yet come through. Add my point above that we should try to spend any spare savings on things that don’t have tax added to them, like food, rather than things that do, and the impact on the hospitality industry could be even more serious than seemed likely ahead of the war.
So a recession? Not necessarily. The way share prices have responded positively in the past two days shows a mature approach to all the stuff that has been fizzing about. I do feel the markets have been much wiser than the politicians. However, I don’t believe they have got the trajectory of BoE base rates right. I really cannot see the BoE making three increases in rates this year, as suggested by market values. The rise in gilt yields is, so to speak, doing the job of damping down borrowing ardour for it. If the markets make everyone more cautious, the BoE doesn’t have to add to the gloom. Maybe one increase in the autumn, but no more.
Finally, let’s celebrate the resilience of the world economy. It managed to brush off the damage from Trump’s tariffs. This is a harder blow, but I feel it will cope with this one, too and avoid a global recession.
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