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UK needs to slash spending, unemployment shrinks again: HL’s Sophie Lund-Yates digests today’s economic news

broke budget spending

 

  • Painful spending cuts needed to balance UK’s books, think tank warns

  • Consumers spending more mindfully as we look towards festive trading

  • UK jobless rate falls to lowest point since 1974

  • Brent crude prices stall at $96 amid strong dollar and weakening demand outlook

Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown comments on today’s latest news as follows:

“The Institute for Fiscal Studies has warned the UK faces a significant shortfall in revenue, given the weakened economy and promised tax cuts. According to the think tank, the government will need to slash spending by £60bn a year by 2026-2027. That is an enormous sum, and something that doesn’t gel with promises that current plans are the best way to get the country back to a prosperous position. Chancellor Kwasi Kwarteng is likely to rebuff these predictions and stick to the notion that tax cuts are expected to deliver adequate spending for public services. Some of the IFS’ suggestions include limiting public investment of national income and cutting most department budgets. Ultimately, the findings are unproven but will be adding to the general anxiety surrounding the trajectory of the UK’s economy, especially at a time when government borrowing costs are on the rise, and top economists have cast doubt on the current plans. There was always likely to be disagreements about how best to tackle the economic conditions, but what needs to be avoided is that of a self-fulfilling prophecy. As people become prematurely nervous about something that hasn’t happened yet, growth can very quickly be sapped out the economy.

Consumers are already spending more mindfully, with sales of blankets and air fryers on the up as people dig in ready for the winter, amid the cost-of-living crisis. The increased popularity of these items might sound like a small shift in spending patterns, but it highlights much more. The sheer notion that customers are worried enough about their heating bills that they’re turning to blankets is a canary in the mine when it comes to spending resilience as we head into winter. The festive season is fast approaching, which is enormously important for retailers. For many this year it will be make or break following the tribulations of lockdowns. There is a real risk that this Christmas trading season isn’t nearly as merry as it needs to be to sustain a lot of businesses.

One chink of light comes as the UK jobless rate has fallen to lowest point since 1974, coming in at 3.5% in the three months to August 2022. That was better than forecast and mirrors the US’ latest data in which fewer vacancies have been added than feared. Employment levels are an important forward-looking indicator when it comes to assessing the economy’s next move, and these figures offer some hope to the spending power of the UK consumer base. However, this can change on a dime, and with the overall number of people unemployed for between 6 and 12 months increasing in the quarter, we are still facing an uncertain situation.

That brings us back to wider global growth concerns, which together with a strong dollar has seen the price of Brent crude stall at around $96 a barrel. The dollar has extended a rally, on the basis of expectations that the US Federal Reserve will continue aggressive tightening plans. This makes greenback priced oil pricier for buyers holding other currencies. At the same time, latest estimates suggest the US and global economy will have checked into a recession by the middle of next year, so demand expectations have been badly shaken, largely offsetting concerns about supply constraints – at least in part thanks to OPEC+’s decision to trim production in a big way.”

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