ECONOMY ROUND UP
Released On 1st Aug 2022
The state of the UK economy has shifted significantly since our last newsletter. The war in Ukraine has caused instability in the energy sector, which in turn has caused further cost increases.
Farmers are being hit harder than the average person in the UK. The average household is seeing inflation of between 9 and 10%, whereas our farming clients are seeing inflation at around 28 to 30%.
There is a real fear amongst economists that the UK will slip into a recession. Some economists, with the value of hindsight, feel that the Bank of England was too slow in raising interest rates following the reduction in early 2020.
Interest Rates
We have seen steep rises in interest rates over the past quarter. We are likely to see further increases over the next 12 months.
It is currently forecast that the base rate will rise to around 2.5% to combat the rise in inflation. However, the United States are predicting a rate over of 3%. I therefore believe that the Bank of England base rate will likely increase to be over 3% in line with the States’ predictions.
The money markets are reacting to these likely increases. The cost of fixed rate money is now cheaper over the longer term than short.
Inflation
Inflation is currently at 9.1% (May 2022) it is likely that we will see this continue to rise. Many economists are expecting inflation in the UK to peak at around 10% in the winter months of 2022.
Inflation is causing a cost of living crisis across the UK. Some feel that the concern from the media is slightly overhyped. The Bank of England reports show that cash deposits across the whole of the UK are up a sixth since the start of the pandemic. This would indicate that households should have enough cash reserves to cope with this cost of living increase.
In farming we are currently seeing inflation of around 28 to 30%. This is likely to continue to rise, and whilst we have seen commodity and milk prices rise, at some point this will plateau.
Labour
Across most industries we are seeing labour shortages. There are currently 1.3m job vacancies in the UK, the normal level is around 850k.
A labour shortage is driving an increase in labour cost. Employees have more bargaining power as they are in demand and the increase in the cost of living is causing Employers to have to give business wide salary inflation increases.
Managing your staff is therefore more important than ever. There is balance between retaining your current staff and not allowing your wage bill to spiral.
Energy
The cost of energy to the end consumer has risen immensely over the past 6 – 12 months. For most farming businesses this will have a considerable impact on their fixed costs.
It is likely we will see further price increases over the winter when the demand for energy rises in domestic households.
There is a real likelihood that we could see an energy shortage in the winter months. This shortage could be critical if we have another “Beast from the East”. In times of energy shortages, the UK pumps gas across the English Channel from Europe (from Russia). There is a high likelihood this back up supply will not be available or will come at an enormous cost.
