UK plc will feel the squeeze, says RUTH SUNDERLAND
UK plc will feel the pressure: ultimately higher productivity and growth is the only way out, says RUTH SUNDERLAND
- We should be concerned about British business
- UK plc – as well as the government – is facing much higher levels of debt
- The water industry, a traffic accident, and other companies with debts will come under pressure
When the bosses of the High Street mortgage lenders recently went to meet Jeremy Hunt, they went to great lengths to tell the Chancellor that millions of homebuyers are very concerned, but only a small percentage are really in trouble.
The banks believe that the majority of borrowers will be able to meet higher repayments, albeit with some painful sacrifices.
The current crop of chief executives was still young during the massive takeback crisis of the late 1980s and early 1990s. But their belief is that the same mistakes will not be repeated because they have the financial resources and the willingness to help families through it.
The banks also have much more advanced data analytics, giving them much better insight into their customers: lenders can alert them to those who get into trouble.
Most owner-occupiers are mortgage-free, and millions more have significant equity in their properties. Of those who do have a home loan with one leading institution, the average income is a healthy £75,000 a year. This confirms the government’s refusal to provide aid to taxpayers.
Feel the squeeze: UK plc – as well as the government – is facing much higher levels of debt
That would amount to a subsidy that goes mostly to people who don’t really need it, which would be inflationary in itself. It would also fuel the post-Covid lifeboat mentality, where the government is expected to endorse any calamity.
Rate hikes are supposed to hurt, and if they don’t, they won’t work. That said, the outlook for households could worsen.
At the moment it seems that most people can take the price pain, but that scenario is based on unemployment remaining low. Will it though? Sectors such as leisure, restaurants and transport are likely to be affected by consumer tightening. Jobs could be lost in those sectors and others, such as agriculture.
If the unemployment rate rises from the current 3.8 percent to, say, 5 percent — still historically low — it would be a shock to the economy.
House prices have remained relatively robust, which has supported confidence.
The latest national figures show an annual decline of 3.5 percent in the year up to and including June. The decline would accelerate as unemployment picks up.
We also have to worry about British business. UK plc – as well as the government – is also facing much higher levels of debt. The water industry has been a very public victim and other heavily indebted companies will come under pressure.
There will be furrowed eyebrows for entrepreneurs running small businesses who had to borrow through Covid, then faced monstrous utility bills and now rising rates.
Even in the absence of large-scale failures, this is not a favorable environment for companies to invest.
The UK compares unfavorably to the US as an investment destination, where money is pouring in thanks to President Biden’s Inflation Reduction Act.
The latest UK business investment figures for the first quarter are even better than expected with an increase of 3.3 percent.
This is partly due to projects being brought forward to take advantage of tax benefits. All in all, the trend has been weak for years.
The government should support industries where we have the scope to excel. It should also partner with companies such as Centrica, which wants to invest £2bn in a hydrogen storage facility that could make the UK a world leader if ministers provide a sensible regulatory framework.
Ultimately, higher productivity and growth is the only way out.