Deserved criticism of UK fiscal policy continues

Chris Scicluna
Emily Nicol

IMF & Moody’s join chorus of deserved criticism of UK fiscal policy after 30Y yields rise to 2-decades high; DMO sale of new 2053 Green Gilt and comments from BoE Deputy Governor to be watched this morning
With long-dated Gilts resuming their sell-off this morning against the backdrop of an ever-louder chorus of disapproval of the UK government’s fiscal plans, the DMO's sale of its 2053 Green Gilt planned for today will certainly be closely watched. Indeed, the heightened risks to economic and financial stability – reflected among other things in yesterday’s further rise of close to 50bps in the 30Y yield to 5.0% for the first time in two decades – last night provoked rebukes from the IMF and Moody’s. In an extraordinary statement evidently motivated in part by fears of global spill-overs from the UK government’s ill-judged and incompetently presented plans, the IMF made clear that it does “not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy”. Adding that the measures “will also increase inequality”, the IMF gave a clear steer that the government should U-turn on its proposals when it announces its medium-term plans on 23 November.

Meanwhile, Moody’s judged that the “Large unfunded tax cuts are credit negative”, not least as they “will lead to structurally higher deficits amid rising borrowing costs, a weaker growth outlook and acute public spending pressure”. The ratings agency added that a “sustained confidence shock…could also more permanently weaken the UK’s debt affordability”. Moreover, it expressed concerns about the “weakening predictability of fiscal policymaking”, “uncertainty around the government’s continuing compliance with its (often revised) fiscal rules” and “policymakers' forward-planning ability and their willingness or ability to deliver on the targets they set”. It also flagged “wider market concerns around the credibility of the government's fiscal strategy”, and cautioned that a “sustained confidence shock, accompanied by concerns around the government's commitment to fiscal prudence and/or the central bank's ability to contain inflation, could more permanently weaken debt affordability and the UK's credit profile”. In our view, unless the government follows the IMF’s advice and announces a U-turn of its income tax cut plans on 23 November, the UK sovereign looks set on an accelerated path to credit-rating downgrades.

Against this ugly backdrop, comments this morning from BoE Deputy Governor for Financial Stability Jon Cunliffe will also be closely scrutinised for hints that the Bank will blink and take action to stem the rout in markets. Yesterday's remarks from Chief Economist Pill, however, suggest the Bank hopes to hold out until its next scheduled MPC meeting in November before pulling the trigger on a "significant" hike.

UK shop prices up at fastest pace on the BRC series
The dire inflationary backdrop to the UK government’s misguided fiscal plans was illustrated by the latest BRC shop price survey results released overnight. On the BRC’s headline measure, prices on the UK high street accelerated at a record rate this month, with pressures becoming increasingly broad-based. The headline survey measure rose a further 0.6ppt to 5.7%Y/Y, having on average been firmly negative in the decade before the start of this year due to the intensity of competition within the UK retail sector. While pressures remained strongest in food prices, up 1.3%M/M and 10.6%Y/Y, prices of non-food items were also higher, rising 0.4%M/M to be similarly up at a series high of 3.3%Y/Y. Of course, the marked depreciation of sterling over the course of this month is bound to add a further significant inflationary impulse, perhaps adding a further 2% to the price level over the coming two years.

German consumer confidence hits new low as slump in income expectations suggests that ECB fears of a wage-price spiral are way off the mark
Given the deterioration reported in last week’s flash euro area consumer confidence indicator to a fresh record low at the end of Q3, today’s German GfK consumer survey was predictably extremely downbeat, similarly with a series low registered, reinforcing expectations that the euro area’s largest economy is slipping into recession. Given the expiration of the summer travel discounts at the end of August, the likely marked rebound in inflation this month, and a higher proportion of income being spent on (and put aside for) energy, households were especially downbeat in their expectations for incomes – indeed, the relevant survey index slumped a whopping 22.4pts in September to -67.7, the lowest since the series began in 1991 and some 48pts lower than the initial pandemic trough. That suggests that ECB fears of a possible wage-price spiral are well wide of the mark. 

Against this backdrop it was perhaps somewhat surprising that households’ willingness to buy didn’t deteriorate by a greater extent, although the survey gauge was still down for the eighth consecutive month to -19.5, the lowest since the global financial crisis in 2008. Overall, the headline confidence index fell 5.9pts in September to -36.8, with the survey’s forecast for October expected to be down another 5.7pts at -42.5, more than 10pts below the Q3 average and a new survey low.

French consumer confidence also falls to a survey low, amid rising concerns about financial situations and unemployment
French consumers similarly have never been more downbeat over the past five decades. INSEE’s headline sentiment index fell a steeper-than-expected 3pts in September to 79, well below the long-run average (100) and some 10pts lower than the initial pandemic trough, to match the survey lows previously recorded in July this year and May 2013. Like in Germany, French households were markedly more concerned about their future financial situation, with the relevant survey index (-28.4), the second-lowest reading on record and well below the long-run average (-6). As such, the share of households judging it a good time to make major purchases edged further below the long-run average, with the respective index on average some 6pts lower in Q3 and implying a decline in spending. And the outlook for consumption seems bound to remain weak, with consumers reporting rising fears of unemployment in the current uncertain economic environment and a lack of opportunities to save. Looking ahead, the Italian ISTAT consumer and business surveys are likely to mirror the increasing pessimism recorded elsewhere in the euro area at the end of the third quarter.

US pending home sales and advance goods trade reports due
Following the massive (albeit certainly temporary) upside surprise to yesterday’s US new home sales data (up 28.8%M/M), there is a good chance that today’s pending home sales figures will also come in stronger than had been expected – the Bloomberg consensus was for a drop of 1½%M/M to mark the ninth monthly drop out of the past ten. Advance goods trade numbers for August are also due. Lower prices of petroleum products and other inputs are likely to weigh on the value of both imports and exports, although a rebound in imports of consumer goods after a surprising drop in July raises the prospect of a widening in the nominal goods trade deficit in August. In terms of Fed-speak, Chair Powell will give pre-recorded opening remarks at a St Louis Fed banking conference, while various other FOMC Governors will also be speaking publicly. 

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