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WeekWatch -‘After weeks of increasing political pressure, last week Chancellor Rishi Sunak announced a £15 billion support package’ May 22

WeekWatch -‘After weeks of increasing political pressure, last week Chancellor Rishi Sunak announced a £15 billion support package’ May 22

After weeks of increasing political pressure, last week Chancellor Rishi Sunak announced a £15 billion support package to help the population cope with rising fuel costs.

People are struggling with mounting gas and electricity bills, which are likely rise again in October, after the annual price cap is expected to rise by a further £800. To help with these cost increases, Sunak announced an energy grant of £400 for all UK households, with additional grants for low-income households, those with means-tested disability benefits, and pensioners.

The move will be partly funded by a windfall tax on the profits made by oil and gas companies, however much of it will come from additional borrowing.

David Page, Head of Macroeconomic Research at AXA Investment Managers, said the package was larger and more targeted than expected, and would help act as a buffer against rising energy costs.

However, he added: “Assuming that today’s package will be largely debt financed, this amounts to additional fiscal stimulus, something that is likely to maintain growth in excess of trend in Q3 this year. As such, we think that this will lead the Bank of England to tighten monetary policy further to ensure that inflation falls back sufficiently over the coming years.”

Paul Dales, Chief UK Economist at Capital Economics, suggested four key consequences as a result of the package:

  • Household income won’t fall as far this year as had been likely – but it will still fall
  • GDP growth will be about 0.3% higher than previously expected
  • Inflationary pressures will increase. Capital Economics raised its inflation targets for 2023 from 4.3% to 4.8%, with half of this increase being directly caused by these measures.
  • With inflation increasing, the Bank of England will need to do more to reach its 2% inflation target. Therefore, it will likely increase interest rates to a greater extent.

Turning to the US, the S&P 500 rose by more than 6.5% last week, buoyed by solid retail sales data. Purchases rose by 0.9% during April whilst the March data was also revised higher. With wage growth remaining below the rate of inflation, the increase in activity has been led by households spending savings they accumulated through the pandemic. Whilst that clearly isn’t sustainable over the long term, the recent strength in consumer spending points towards US economic growth of more than 3.0% in the quarter, reversing Q1’s contraction.

Eoin Walsh, Partner, Portfolio Management at TwentyFourAM, said this increased spending matched recent comments from US banks. He noted: “We think that the large US banks probably have the best insight into the health of the US consumer, as they service all cohorts of the population and all sectors. Therefore, comments from Bank of America (BoA) CEO Brian Moynihan stating that BoA’s customers are yet to spend significant stimulus money, possess higher deposits than a year ago and are spending more, support the view that the US economy remains relatively healthy.

“These comments followed the JP Morgan CEO, Jamie Dimon, saying that the US economy remained strong and “credit looks really good”. The sources of these comments are well-regarded and mean investors have reason to reconsider the growing view that the US economy was heading for a hard landing.”

In contrast, Developing markets have struggled of late for several reasons. One of these has been the ongoing weakness of Chinese equities. Over the last year, these have been hit by tightening regulations in some sectors, issues with property developers (most famously Evergrande), and most recently due to resurgent COVID-19 worries. The latter of these points has seen Shanghai placed under a strict lockdown for some time now.

However, there are a number of voices suggesting pessimism around China could be peaking. Tom Wilson, Head of Emerging Market Equities at Schroders, admits: “Unlike many other countries, policy stimulus is being applied and if the zero-COVID-19 policy leads to fewer restrictions, the economy could rebound from a low base. Emerging market investors are underweight China, according to industry surveys, and the equity market has cheapened.”.

AXA Investment Managers, Schroders, and TwentyFourAM are fund managers for St. James’s Place.

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