In summary, there is one key takeaway from the latest OBR forecasts: a growing share of the UK economy’s resources will now be directed towards debt servicing. The sensitivity of the public debt burden to changes in interest rates has increased, which leaves the economy exposed to further shocks.
The long-term solution clearly lies in improving the supply side of the economy and boosting productivity. But resources that could have been directed towards this end are now going towards debt interest payments. Higher debt interest is crowding out productive investment.
Britishvolt may be a prime example. The Government had pledged a £100mn grant back in January but the battery start-up has yet to receive any of this funding. Britishvolt has now renewed a plea for £30mn, after Glencore stepped in last minute to pull the business back from the brink of administration.
The UK could fall further behind. According to Northvolt, the Inflation Reduction Act would subsidise a factory in the US by about $600mn-$800mn, attracting companies to shift away from Europe.
Real household disposable income per person is set to fall 4.3% in 2022-23, the largest drop since records began, and another 2.8% in 2023-24. But public sector borrowing will still total 7.1% and 5.2% of GDP over the next two fiscal years, respectively. This level of borrowing should keep up the pressure on the BoE to raise rates in the short term: headline CPI inflation jumped to 11.05% in October, beating expectations once again.
Food prices surged 16.5% y/y in October, estimated to be the highest since 1977, according to the ONS. The core rate (ex-food, energy, alcohol & tobacco) eased from 6.54% to 6.49%, driven by core goods (from 6.98% to 6.71%). But services CPI inflation firmed to 6.28% and has not peaked yet. Wages pressures have intensified: the y/y increase in average weekly earnings in the private sector accelerated to 7.0% in September (ex-bonuses).
The stability of the economy hinges on a swift return of inflation to target. Another leg up in gilt yields would be very destabilising, both for the housing market and the public sector finances. But markets are going to have to absorb a record amount of Gilt issuance over the coming years without the help of QE. With extremely low productivity growth and a weak supply side, there are no easy solutions.
