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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK facing ‘grim economic outlook’ as Jeremy Hunt warned against excessive austerity – business live

Jeremy Hunt United States Mohamed ElErian Office for National Statistics United Kingdom Kwasi Kwarteng Inflation
A view of the skyline of the City of London.
A view of the skyline of the City of London. Photograph: Neil Hall/EPA

Track the autumn statement here

The autumn statement is about to start – we’ll be live-blogging it all here:

Burberry shoppers snap up goods in Paris and Milan, not London

Tourists hoping to snap up Burberry products are heading to Paris and Milan rather than London, while luxury shoppers face price significant increases as costs rise, according to the British fashion brand.

Burberry, which plans a return to the “Britishness” of the 167-year-old company in a refocus under new chief executive Jonathan Akeroyd, said that American tourists in Europe fuelled a double-digit increase in store sales in the three months to the end of September.

While the UK performed strongly within Burberry’s European operations, its finance and operating chief Julie Brown said that the UK government’s decision to stop allowing tourists to reclaim VAT on shopping purchases has hurt Britain’s status as a holiday shopping destination.

“There has been an increase in tourists, particularly American, but not at the same degree as we used to see,” she said.

“More tourists are going to Paris, Milan and continental Europe. Tax free shopping was a real incentive for the luxury shopper to come to the UK.

“The UK is performing well, but we are now finding tourists are tending to go more to continental Europe, and that also has knock-on implications for other industries including hospitality and hotels.

Strikes by bus drivers are set to continue after drivers turned down a below inflation pay deal, PA Media reports.

The GMB union said two-thirds of its members working for Stagecoach in Sunderland rejected an offer which was below the 10% being demanded.

Almost 200 drivers have taken several days of strike action already.

GMB official Stuart Gilhespy said:

“Sunderland Stagecoach drivers are in desperate need of a pay rise with the cost-of-living crisis.

“They’ve shown bravery in declining the offer in order to hold out for what they believe they’re worth.

“Sunderland’s drivers have seen workers in Stagecoach depots across the country receive double digit pay rises - they want and deserve the same.”

Eurozone inflation hits 10.6%

The UK isn’t the only place suffering double-digit inflation (as Jeremy Hunt may remind MPs shortly).

In the eurozone, annual consumer price inflation climbed to 10.6% in October 2022, up from 9.9% in September, new figures from Eurostat show.

The energy crisis was the biggest factor, with prices 41.5% higher than a year ago.

But households were also hit by rising food, alcohol & tobacco prices. up 13.1% higher than a year ago,

The lowest annual rates were registered in France (7.1%), Spain (7.3%) and Malta (7.4%). The highest annual rates were recorded in Estonia (22.5%), Lithuania (22.1%) and Hungary (21.9%).

UK inflation hit 11.1% in October, again lifted by energy bills and food:

Updated

UK firms fear lower turnover in December

A quarter of UK firms expect their turnover to fall in December – a timely sign that the economic outlook is weakening.

Just 13% expect their turnover to increase, according to the Office for Budget Responsibility.

The slowdown is already underway, too. The ONS found that 25% of businesses reported turnover was lower in October than September 2022, while 15% reported a rise in turnover.

Debit card data shows a drop in spending in most sectors last week, the ONS add, as consumers cut back.

Updated

In other business news, Royal Mail has asked the Government for an early move to cut its letter service to five days a week, dropping Saturday deliveries.

Chief executive Simon Thompson vowed to do “whatever it takes” to turn the group around, after the group unveiled hefty losses after a hit from crippling strike action.

Royal Mail has plunged to a first-half loss of more than £200m, blaming the financial impact of ongoing strike action, a fall in the number of parcel deliveries and inability to restructure the business while at loggerheads with unions.

Updated

Here’s AJ Bell investment director Russ Mould on the situation in the markets this morning:

“If the mini-budget was what made the UK economy and its assets sickly, today is the day on which some painful medicine is delivered in the form of the Autumn Statement.

“By trailing many of the measures Chancellor Jeremy Hunt has gone out of his way to avoid any surprises, with the key aim to placate international investors in gilts and the pound. These are the markets the government will be watching as they look to gauge the reaction.

“The FTSE 100 was a touch lower on Thursday morning after a weak showing on Wall Street following an ultra-gloomy outlook from department store chain Target which sparked fresh concern about the US retail sector.

“Online groceries firm Ocado continues to attract brickbats with hedge fund manager Kintbury Capital pointing to 50% downside potential in the shares, which have already more than halved year-to-date.”

Autumn statement 2022 live: Jeremy Hunt to unveil UK budget plans

My colleague Andrew Sparrow is live-blogging the autumn statement in his Politics Live blog. I’ll nip over there later to (hopefully) lend a hand.

Andrew points out that this is the second, if not the third, colossal “fiscal event” of the autumn, much bigger than a usual budget.

The first was Kwasi Kwarteng’s mini-budget. Then there was Jeremy Hunt’s announcement in his first full day as chancellor abandoning almost all the measures in the mini-budget – the biggest government U-turn in the modern era.

And today Hunt, now working for a new prime minister, will set out a fiscal strategy that entirely reverses the Kwarteng/Liz Truss one.

He also says that autumn statement is bigger than just be a repudiation of the short-lived and disastrous Truss premiership.

In some respects Hunt will undoing policies that the Conservatives have championed for much of their last 12 years in office. David Cameron and George Osborne kept increasing the personal tax allowance, so they could remove more and more people from having to pay tax in the first place.

Today Hunt is going to extend the period for which allowances are frozen, using this as a stealth tax, and dragging more people into paying tax. Osborne cut corporation tax significantly. Now it is shooting up again.

Rachel Reeves MP, Labour’s Shadow Chancellor, has said 12 years of economic failure under the Conservatives have held the UK back.

Speaking ahead of the autumn statement, she says:

“Britain has so much potential but we are falling behind on the global stage, while mortgages, food and energy costs all go up and up.

“The country is being held back by 12 years of Tory economic failure and wasted opportunities and working people are paying the price.

“What Britain needs in the Autumn Statement today are fairer choices for working people, and a proper plan for growth.

“That’s why Labour has a long-term plan to get our economy growing again – powered by the talent and effort of millions of working people and thousands of businesses.

“It will be fairer, greener, and more dynamic. Labour’s Green Prosperity Plan, our modern Industrial Strategy and our active partnership with business will get our economy firing on all cylinders.”

Jeremy Hunt will deny that he’s returning the UK to austerity, reports Steven Swinford of The Times:

But, David Laws – who was a Liberal Democrat minister in the 2010 coalition government – argues that Hunt faces a very different situation than George Osborne.

Laws told the Today Programme that the government, and the markets, need to realise that the 2010 freeze on public spending followed strong growth in spending under Labour.

That meant it was much easier to limit spending. We couldn’t really be in a different position today, Laws points out, given 12 years of effective public sector austerity, rising inflation, and record NHS waiting lists.

Updated

UK 'to spend billions on energy efficiency'

The UK government is set to spend billions of pounds to insulate homes and upgrade boilers in a drive to cut Britain’s overall energy demand by at least 13% this decade.

The energy efficiency push is set to be unveiled on Thursday by Chancellor of the Exchequer Jeremy Hunt as a major spending commitment in his Autumn Statement, according to Bloomberg.

They say:

Ministers are proposing to create a task force to oversee the program, which will include new funding from 2025 through 2028, according to the people. The government is also preparing a public information campaign to encourage individuals and firms to reduce their energy consumption.

Brian Berry CEO of the Federation of Master Builders, says it would be a ‘great start’ to tackling the energy crisis:

London made the fastest recovery from the pandemic last year, according to new data from the Office for National Statistics.

GDP in the capital grew by an annual rate of 14.4% in the first three months of this year, followed by Scotland (+12.8%), the North East (+12.4%) and the South West (+11.3%).

The ONS also reports that all of the nine English regions showed positive growth in Q1 2022, led by the North East and the East Midlands which both grew by 1.2%, followed by London with an increase of 1.1%.

Wales saw no quarterly growth, though.

Eight weeks really is a long time in politics….

Analyst: If Autumn Statement moves markets much then it's a cock-up

The City is in a subdued mood ahead of the autumn statement at 11.30am.

The blue-chip FTSE 100 index has dropped by 0.5%, while the UK-focused FTSE 250 index of smaller companies has lost 0.3%.

The pound is a little weaker against the dollar, at $1.188 (but still much higher than before the mini-budget, let alone afterwards…).

The bond market is calm, and one of Jeremy Hunt’s objectives will be to “make gilts boring again”, says Neil Wilson of Markets.com. He writes:

If the Autumn Statement moves the markets much then there has been a cock-up.

The messaging from the Treasury thus far has been very clear – heapings of fiscal discipline and lashings of austerity, no uncosted borrowing.

It’s about restoring credibility in the financial markets and very little else.

But could there be a surprise or two? Wilson thinks Hunt and Sunak might save then up until nearer the election.

Chancellors love to pull a rabbit or two out of the hat and fiscal credibility goes hand in hand with winning the next the election as far as the Tories go, so it might not be as horrendous as some of the various test balloons floated by the Treasury in recent weeks would suggest.

A credibility premium, though, is worth more right now and the surprises will be saved up for next year ahead of the election…when they can apply some soothing tax cuts and say they could only do that because of the difficult steps taken in 2022.

Updated

The German-owned discount grocer Lidl has quadrupled its UK profits as shoppers look for ways to save money.

Lidl reported a 1.5% rise in UK sales to £7.8bn in the year to the end of February but pretax profits surged 319% to £41.1m as the group trimmed costs as measures to control the Covid-19 virus eased.

Out in the real economy, pub chain Fuller, Smith & Turner has told shareholders that it faces continued pressure from high inflation, steep energy bills and interest rate hikes.

Fullers also expects a robust Christmas period and an added boost from the upcoming football World Cup. More here.

James Meadway, director of the Progressive Economy Forum, insists Jeremy Hunt should not be making huge spending and tax decisions on the basis of uncertain forecasts.

Writing in the Guardian today, Meadway says the government should focus on hard economic facts, not an arbitary target to get debt falling at a future date.

He says:

This screeching U-turn in government policy – contradicting promises to end austerity and its commitments in the 2019 manifesto – is being driven by nothing more than an insubstantial statistical artefact. The “fiscal black hole” is not a hard economic fact. It’s the result of uncertain forecasts and the government’s own target for the level of debt in five years’ time.

This isn’t the same as looking at (for instance) real wages – currently falling rapidly – or rising unemployment today. It would be a profound error to use this ghostly “fiscal hole” as an excuse to drag the country back into the economic doom-loop of austerity.

Five charts that will shape the UK’s autumn statement

These charts show the UK’s poor economic situation, with inflation at a 41-year high and a recession possible underway – and government departments bearing the scars of the last austerity drive.

My colleague Richard Partington’s full analysis is here:

TUC warns against austerity

Frances O’Grady, general secretary of the Trades Union Congress (TUC), warned against the dangers of austerity.

Speaking on BBC Radio 4’s Today programme ahead of the Chancellor’s autumn statement, she said that tough spending cuts are “never easy for working people”.

O’Grady said that George Osborne’s austerity plan had “failed”, so it would be a mistake for Jeremy Hunt to make similarly painful cuts.

“We have been suffering weak growth as a country ever since, because it was killing the golden goose.

“If you are starving the NHS, our education and skills system, of funding that has an impact on the economy because we need a healthy workforce, we need educated, skilled and trained workers.

“Now we really need big investment in green infrastructure and our public services, if we’re going to grow.”

Bloomberg’s Phil Aldrick tweets that the cost of paying off the UK’s debts will be in focus today.

Inflation has driven up Britain’s debt servicing costs, because the interest rate on ‘index-linked gilts’ goes up, or down, in line with the Retail Prices Index. RPI surged over 12% last month.

Updated

Investec: Politics and economics pulling in fundamentally different directions

It’s an understatement to say that Jeremy Hunt faces a difficult balancing act today, says Investec economist Phil Shaw.

Politics and economics are pulling in fundamentally different directions: the evident need to assist in light of the cost-of-living crisis, which underpins much of the current wave of industrial action, collides with the hard truth that markets need to see the public finances being kept on a sustainable footing.

As the Truss administration found out, the latter is neither negotiable nor easily kicked into the long grass: credibility must be shored up, to avoid a return of the volatility in markets and surges in yields that can worsen conditions for the whole economy in a short space of time.

Fresh austerity will be a “significant drag on economic activity”, Shaw points out, which will push the UK economy into recession through next year.

But, it would also mean the Bank of England wouldn’t need to raise interest rates as high as expected.

Updated

Jo Michell, associate professor in economics at Bristol Business School, detects that the excuse for fresh austerity seems to have shifted.

Updated

Hunt: we're taking difficult decisions

The Treasury have released a video to set the scene for the autumn statement, involving several cabinet members.

To the backdrop of a menacing drum roll, chancellor Jeremy Hunt said:

“Today we are having to take some difficult decisions to restore stability, bring inflation down and balance the nation’s books.

“So this is our plan to build a stronger economy, protect public services and make sure we look after our most vulnerable.”

The plan will include support for the most vulnerable with their rising energy costs, says business secretary Grant Shapps, and “asking energy companies to pay their fair share” (that could be a windfall tax on electricity producers).

Education secretary Gillian Keegan said investment would focus on “skills and ensuring the British people have access to greater opportunities”.

While health secretary Steve Barclay said it would “deliver on our promise of a stronger NHS and tackling the Covid backlogs”. Yesterday, Barclay hinted that the autumn statement will involve giving more money to the NHS.

Home secretary Suella Braverman said the Government would “make our streets safer, support our security services and control migration”. (although her £63m deal with France to reduce the number of people trying to cross the Channel in small boats has been condemned by unions, refugee groups, and some Conservative MPs).

And prime minister Rishi Sunak echoes the point about restoring stability, saying:

“Today’s statement will help deliver the long-term stability this country needs.”

Hunt 'risks pushing back economic recovery'

The most famous quote about bonds comes from Bill Clinton’s chief strategist James Carville.

Carville joked that if he was reincarnated, he’d like to come back as the bond market, rather than the president, the pope or a baseball star, because then “you can intimidate everybody.”

Kwasi Kwarteng and Liz Truss can confirm this – they lost their grip on Downing Street after the bond market flexed its muscles, sending UK borrrowing costs soaring.

Changes in long-term government bond yields

But Jeremy Hunt risks worsening the recession by slashing spending and hiking taxes in a bid to placate the bond vigilantes in the city.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says:

The UK government’s Autumn Statement will mark a complete about turn from the Truss administration’s plans for a sugar rush boost to growth through tax cuts which sparked mayhem on bond markets and saw the UK’s risk premium shoot up. Gilt yields have come down significantly since the September scare which threatened to destabilise the UK financial system, and the Sunak administration is desperate to hold onto credibility.

By taking all these steps the government hopes to fill in the fiscal ‘black hole’ which has emerged because successive Conservative ministers have said they want to see net debt falling by 2025-2026. Sunak and Hunt are trying to dance to a tune they think the bond markets are playing, but by keeping so strictly to their perceived rules, they risk playing it too safe, and pushing the prospects of economic recovery far into the distance. ‘’

UK facing grim economic outlook

Economists predict that the Office for Budget Responsibility will paint a very bleak economic picture in their forecasts today.

Sanjay Raja, senior economist at Deutsche Bank, says:

Expect a deep and protracted recession in 2023 with growth likely to remain subdued until 2025 at the earliest. Inflation projections will also be increased significantly, with more persistence baked into the OBR’s projections.

And in terms of the labour market, we expect the OBR to forecast a slow labour force recovery, with the unemployment rate pushing to around 5.5% to 6% over the next two to three years.

All up, the challenging economic outlook will likely underscore the main reason for the size of the fiscal hole, with our borrowing projections pushing a little above £90bn in 2026/27 [compared with £32bn after the Spring Statement].

Deutsche Bank's forecasts for the OBR's latest growth outlook

Torsten Bell, chief executive of the Resolution Foundation think tank, also expects some “pretty bad economic news”.

Bell told Sky News the UK faced a “grim economic outlook”, with the economy growing very slowly and “possibly ending this Parliament as weak as it began”.

He added that this would be “much weaker than we were previously expecting”, and also predicted that unemployment will rise.

The UK’s fiscal watchdog will release its latest outlook on the economy and public finances today, alongside the Chancellor’s Autumn Statement.

Kwasi Kwarteng’s refusal to allow the Office for Budget Responsibility to assess his planned tax cuts contributed to the market mayhem after the mini-budget, as investors judged the measures weren’t credible.

Harriett Baldwin, the chair of the Treasury Select Committee, has welcomed the government’s change of heart this time.

Baldwin told Times Radio:

“That’s the number one thing that we’ve been calling for and we’re pleased we’re going to see it today”.

She added that the Treasury Committee hopes the Chancellor’s statement would help the UK’s “productive growth capacity”, but that she does expect it to involve some “delays to infrastructure projects”.

Full story: Millions of UK households to pay more for energy from April

Millions of UK households will pay more for their energy from next April under plans to cut the generosity of the government’s gas and electricity support scheme expected to be announced by Jeremy Hunt on Thursday.

The chancellor is likely to use his autumn statement to say the need to save money and reduce state borrowing will require the household energy price cap to rise from £2,500 to an expected £3,000 to £3,100.

Hunt will also announce higher windfall taxes on oil, gas and electricity firms that have seen their profits rocket after Russia’s invasion of Ukraine in February sent global energy prices soaring.

Despite the fragile state of the economy, the chancellor will say he needs to suck up to £60bn out of the economy through tax increases and spending cuts to help the Bank of England bear down on inflation.

He is expected to lower the threshold at which people start paying the 45p top rate of income tax from £150,000 to £125,000, in a substantial change of direction from the later-abandoned move to abolish the rate under Liz Truss’s government.

There are expected to be increases in capital gains tax and dividend tax, while personal tax thresholds are also likely to be frozen for a further two years from 2025-26. Council tax could also increase, as the rule limiting councils to 3% rises unless they have a referendum could be raised to 5%.

Brace for austerity, and fiscal drag

There are concerns that Hunt could take Britain back into an era of austerity that will add to the woes facing consumers and households, says Victoria Scholar, head of investment at interactive investor.

However the Treasury has two main goals – firstly to outline a fiscal plan that compliments the monetary plan of the Bank of England in terms of its combat against inflation. He needs a strategy that helps to tame inflation, rather than focusing on growth, which was the mistake of his predecessor Kwasi Kwarteng.

The second aim is to reassure the electorate that this is a government of economic credibility, sound money and fiscal competence and to erase the reputational damage brought about by the disastrous mini-budget in September by showing that the Treasury can balance the books by reducing spending and raising taxes.

Fiscal drag looks set to be a big theme this Autumn Statement, Scholar adds. That’s the trick where the chancellor freezes the levels at which people pay higher tax rates.

With upward pressures on prices and wages, the government can raise extra taxes by freezing thresholds on levies such as income tax, inheritance tax and VAT.

This will drag millions more people into higher tax brackets, earnings the Treasury more in terms of tax receipts in a way that is more optically palatable then announcing big swathes of tax increases at a time when the cost of everything from energy to food to mortgages is on the rise.

No economic reason to announce £50bn measures today

Hunt could also be laying a political trap for Labour, if he times many of today’s cuts to land after the general election (due by 2024).

Mohamed El-Erian told the Today Programme:

If you take the politics out of it, you do not need a £50bn fiscal effort today.

Instead, you could do £20bn or £30bn of fiscal tightening today, mostly on the tax side with some spending cuts, and do it in a way that protects the most vulnerable, El-Erian argues.

If however, you decide to go for £50bn and phase the measures until after the election, then clearly there is a political element to this economic approach.

The global financial picture facing Jeremy Hunt is less troubling today, than the choppy seas in which Kwasi Kwarteng launched the mini-budget.

Mohamed El-Erian says the global context in late September was “much more difficult” than it is now.

This week, the pound is trading over $1.19 for the first time since mid-August, and government borrowing costs have come down significantly.

El-Erian explains:

The global context which was a massive, massive headwind to the Liz Truss government is now less of a headwind.

But the domestic economic picture is darker, though. Inflation has hit 11% – and is higher for poorer households – and the economy is shrinking, with GDP down 0.6% in September.

Updated

Introduction: Hunt warned against excessive austerity

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Nearly two months after the turmoil triggered by the mini-budget, chancellor Jeremy Hunt will announce a swathe of tax rises and spending cuts to reassure the markets that the UK is in responsible hands.

Today’s autumn statement is expected to outline plans to cut public spending by around £30bn, along with £24bn of extra taxes.

But many of the tough decisions may be deferred until after the election – creating a political headache for Labour.

Hunt’s also expected to increase benefits, pensions and tax credits by inflation – meaning a 10% rise next April.

But support for energy bills will be trimmed; the average annual bill could rise to £3,000 in the spring, from the current £2,500 cap, alongside a windfall tax on energy generators.

So, having reversed many of the measures in the mini-budget, Hunt is set to take the UK on a completely different path to Kwasi Kwarteng.

But will the markets prefer Austerity 2.0, rather than the unfunded fiscal easing of Trussonomics that sank the pound and drove up borrowing costs?

Mohamed El-Erian, president of Queens’ College, Cambridge, and chief economic adviser at Allianz, says that Hunt faces a very tricky balancing act.

He told Radio 4’s Today Programme that the markets will be looking for confirmation that the UK is restoring its economic reputation, and putting its finances on a sound footing. But, investors also care about growth.

El-Erian said:

They will also be looking for measures to promote economic growth.

It is going to be very tricky, striking the right balance, as there are so many economic and political judgements here.

And he agreed that Hunt risks going too far the other way, if he simply announces huge tax rises and spending cuts.

El-Erian warned:

It could be seen as excessive austerity.

At the end of the day, the answer to all the issues that the UK faces today, from inflation to low growth to a damaged economic reputation is high, sustained, inclusive growth.

It is “absolutely critical” that the government delivers a set of measures to enhance productivity and promote high economic growth, he added.

Yesterday, the Bank of England warned that Britain is suffering a worse economic performance than its rivals because of Brexit and a stark drop in the size of the workforce since the Covid pandemic.

Andrew Bailey also told MPs that the UK’s international reputation has been damaged by September’s mini-budget.

El-Erian agrees that the UK certainly has a credibility issue.

But the bigger question is how large the fiscal black hole actually is – and about the size of Hunt’s fiscal measure, the timing, and the balance between spending and tax cuts.

He says:

There is a concern that there may be a political agenda being played as well as an economic agenda.

The agenda

  • 9.30am GMT: ONS weekly economic activity and business insights

  • 9.30am GMT: ONS report into UK GDP, by regions and countries: January to March 2022

  • 10am GMT: Eurozone inflation reading for October

  • 11.30am GMT: Jeremy Hunt to give autumn statement

  • 1.30pm GMT: US weekly jobless claims

  • 1.30pm GMT: US building permits data

  • 2pm GMT: Office for Budget Responsibility press briefing on its economic and fiscal outook report

Updated

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