Introduction: Rising debt costs add to UK lending in May
Good morning and welcome to our ongoing coverage of business, the global economy and financial markets.
The UK government took more than expected to balance the accounts last month as rising inflation increased the cost of servicing national debt.
May’s public finances, just released, show that the public sector has spent more than it has received on taxes and other revenues. That requires him to borrow £ 14 billion, £ 3.7 billion more than the Independent Budget Accountability (OBR) forecast – and ahead of City’s projections for a monthly deficit of £ 12 billion.
That’s £ 4 billion less than a year ago due to falling pandemic costs such as the Leave Scheme and Test and Trace. But that’s £ 8.5 billion more than in May 2019, before the coronavirus pandemic (COVID-19).
As this chart shows, this is the third largest loan in history (after 2020 and 2021).
The UK government takes Photo: ONS
Tax receivables increased compared to the previous year, which reflects the recovery of the economy; Revenues from value added tax increased by 10% and business rates increased by 13% over a year ago. This helped raise tax revenues to £ 48.3 billion, an annual increase of £ 3.4 billion.
But interest payments on the UK’s national debt jumped 70% from a year earlier. Britain has spent 7.6 billion pounds on debt, about 3.1 billion pounds more than a year ago, when it cost 4.5 billion pounds.
This is because payments on some UK government debt, or guillotines, are linked to the retail price index, which measures inflation (which reached 11.7% last month, we learned yesterday). So as the cost of living increases, so does the interest rate on national debt.
ONS says:
On an accumulated basis this month was the third highest payment of interest on debt made by the central government for each month, and the highest payment made in May.
The United Kingdom occupies Photo: ONS
May’s loan raised national debt (excluding public sector banks) to 2.36 trillion pounds, or about 95.8% of GDP.
Michal Stelmach, a senior economist at KPMG UK, warns that “reducing debt this year remains a long chance”, given that Rishi Sunak’s £ 15 billion support package will add to the loans.
“The pace of deficit reduction is expected to slow in the coming months, with the latest package of government measures on the cost of living providing a net fiscal easing of 0.4% of GDP in 2022-23. We expect loans to exceed the forecast of OBR for March by about £ 20 billion this year, largely due to higher spending and weaker economic growth.
“The debt profile will depend on economic prospects, which face acute risks of decline in the short term, while growing demand for health care, combined with declining working age participation, may also hamper fiscal sustainability. We now expect public sector debt to peak in 2023-2024, missing OBR’s March forecast of two years.
It is coming today
New surveys of purchasing managers in the United Kingdom, the eurozone and the United States will show whether growth is slowing this month as concerns about a possible recession increase.
Millions of rail passengers in the UK have faced another day of disruption as the second strike begins this week. The rail industry is asking people to travel only if necessary today, with less than one in five trains in the UK expected to run.
As inflation in the UK reached a 40-year high of 9.1% last month, industrial unrest may spread as the government faces more calls for wage increases that reflect the cost of living.
The country’s largest teachers’ union warns of strikes this fall without an “inflation plus” deal.
The Central Bank of Norway is expected to raise interest rates from 0.75% to 1%, while the Central Bank of the Republic of Turkey may keep the interest rate at 14%.
The agenda
- 7 am BST: UK Public Finance for May
- 9:00 a.m. BST: Eurozone PMI survey on manufacturing and services for June
- 9 am BST: Norges Bank interest rate decision
- 9.30 am BST: British PMI survey on manufacturing and services for June
- 11:00 a.m. BST: CBI Retail Survey in the United Kingdom
- Lunch BST: Decision on the interest rate of the Turkish central bank
- 13.30 BST: Weekly Report on Unemployment Applications in the United States
- 14.45 BST: State PMI survey of manufacturing and services for June
Updated at 07.48 BST
Private sector growth in both Germany and France has slowed sharply this month, fueling fears that the European economy is faltering.
In France, growth has fallen to its weakest level since the peak of Omicron in early 2022, according to a recent survey of purchasing managers.
In Germany, growth slowed for the fourth consecutive month to a six-month low, signaling a “sustained loss of momentum in the private sector economy.”
We receive the PMI report for the whole eurozone in about 20 minutes …
Copper prices fell to their lowest level in 16 months this morning as fears are heightened by rising Covid-19 cases in a key consumer in China and aggressive interest rate hikes in the United States.
Copper is seen as a barometer of economic health; if the world economy falls into recession, the demand for metals will be reduced.
The three-month copper exchange on the London Metal Exchange fell more than 1% to $ 8,673 per tonne, Reuters reported after falling to its lowest level since February 19, 2021 at $ 8,564.50.
The pound is also weaker this morning, falling by half a cent against the US dollar to $ 1.22.
Fears of a recession weigh on the markets
The recession would put new strain on the UK’s public finances, cutting tax revenues and increasing spending on social benefits.
And concerns about the economic downturn have shaken European stock markets at the start of trading.
In London, the FTSE 100 fell 70 points, or 1%, to 7,018 points, back from last week’s three-month low. Mining companies are among those hit.
The German DAX lost 0.5%, the French CAC 0.6% lower and the Italian FTSE MIB down 1%.
Откри European Opening Bell 🔔
🇬🇧 FTSE 100 decreased by 0.5%
🇪🇺 STOXX 50 decreased by 0.7%
🇪🇺 STOXX 600 decreased by 0.7%
🇩🇪 DAX decreased by 0.4%
🇫🇷 CAC 40 decreased by 0.6% pic.twitter.com/peNzOHy3lV
– PiQ @ (@PriapusIQ) June 23, 2022
Investors fear that rising interest rates to fight inflation could drive economies into recession. Yesterday, the head of the US Federal Reserve Jerome Powell said that the Federal Reserve is fully committed to controlling prices, even if it risks an economic downturn.
Ipek Ozcardeskaya, senior analyst at Swissquote Bank, explains:
Market optimism could not survive Jerome Powell’s testimony yesterday, as he said a recession was possible and calling for a soft landing was “very challenging” in the current circumstances.
More worryingly, Powell mentioned another risk: the risk that the Federal Reserve would fail to restore price stability and allow inflation to take hold in the economy.
Updated at 08.28 BST
The larger-than-expected increase in public loans in May was an early blow to the government on the day it is expected to lose two by-elections, says Paul Dales of Capital Economics:
Moreover, the combination of a further weakening of economic activity and a higher rise in interest rates is likely to mean that loans exceed OBR’s 2022/23 forecast of £ 99 billion by at least £ 10 billion.
This will limit the Chancellor’s ability to reduce taxes and / or provide more grants to households when the cost of living crisis worsens later this year.
Here is Bloomberg’s opinion:
The UK government took more than forecast in May after a 70% jump in interest payments to service national debt.
The budget deficit amounts to 14 billion British pounds, which is 2 billion pounds more than the forecast of economists. Total government spending was higher than the Office of Budget Responsibility’s forecasts in March, while revenue was lower.
Higher interest rates and inflation have raised the money the Treasury spends on its debt service to £ 7.6 billion, the highest in May, from £ 4.5 billion a year earlier. OBR forecasts a jump to £ 19.7 billion in June.
The UK government took more than forecast in May, stressing the risks to public finances as the cost of living crisis threatens to push the economy into recession https://t.co/OekfbdRm2D
– Bloomberg (@business) June 23, 2022
Public finances “started badly” this year
Martin Beck, chief economic adviser to the EY ITEM Club, says public finances have started the financial year badly and could deteriorate.
Although data from May show that the current revenues of the central government continue to grow strongly, the rise was not as stable as expected by OBR. Similarly, the decline in central government spending was less sharp than expected by OBR, driven by the impact of very high inflation on interest payments on debt.
“With the result from April, revised significantly upwards, fiscal 2022-2023 began disappointingly – loans in the first two months of the fiscal year were £ 6.4 billion above the OBR forecast. It is known that borrowing data is prone to revision, so this picture may change. But a further decline in public finances seems likely as we move through the fiscal year.
The slowdown in economic growth could also affect tax revenues, Beck added.
Revenue growth is likely to be under increasing pressure from volatile activity
At the same time, government spending is expected to come well ahead of OBR’s March forecast, given that inflation and interest rates will be much higher and the cost of the government’s recent fiscal support package is yet to come. included in OBR forecasts.
As a result, EY ITEM Club expects the loans to slightly exceed OBR’s March forecast.
Sunak: Rising inflation and the cost of interest on debt are challenging public finances
Finance Chancellor Rishi Sunak warned that rising inflation is a challenge for public finances:
“Rising inflation and rising interest costs are a challenge for public finances as well as family budgets.
That’s why we take a balanced approach – using our fiscal firepower to ensure …
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