The Taxman

A good week for

• Oil rallied c. 12% in US dollar terms
• Equities across the US, UK and Japan gained ground in sterling terms

A bad week for

• Bonds broadly suffered, falling 1-2%
• European equities weakened in sterling terms

UK fiscal policy

In last week’s Spring Statement, UK Chancellor Rishi Sunak offered only limited support to households facing shrinking real incomes. Last year, Sunak announced a freeze in the thresholds for income tax and a new 2.5% health and social care tax on employees and employers, due to start in April. Additionally, the rate of VAT charged on hospitality will now revert to 20%, having previously been reduced to 12.5%, as a means of aiding the recovery from Covid lockdown measures. These measures will increase the tax take, but will weigh on household’s disposable incomes at a time when high inflation is challenging wage growth in real terms. Sunak opted not to reverse any of these tax increases, but did announce some relief measures. These included raising the threshold for national insurance contributions by £3,000, and reducing fuel duty by 5p per litre. The Chancellor also announced his intention to cut the basic rate of income from 20% to 19% in April 2024, one month before the next election. However, net-net, the overall tax burden is rising, which will likely be a drag on consumer spending.

UK

UK inflation accelerated to 6.2% in February, from 5.5% in January, the highest rate since March 1992. Strength in the more stable core components of the CPI calculation underpinned February's print, with surging global goods prices continuing to feed through. The more volatile clothing and footwear and recreation and culture sectors were boosted by unusual seasonal pricing patterns, while year-on-year comparisons were made more prominent by a soft reading last February when the economy was in lockdown. UK real wage growth has been negative for several months now and, while wage growth is expected to accelerate this year, inflation is likely to rise more, with April forecasts above 8%. Consumers may still use pandemic-era savings to supplement spending, but the uneven distribution means lower-income households will face the strain sooner.

Survey data

Business and consumer survey data last week offered the first insight into the impact of the Russian invasion on sentiment. The negative impact was more pronounced amongst those regions closer to the conflict, with European consumer confidence falling 10 points. UK consumer confidence also weakened, albeit less so, while US consumer confidence was almost unchanged. Looking at businesses, March readings of the Purchasing Managers’ Index painted a similar picture, with a modest weakening in the Eurozone and UK, and strength in the US. Europe’s geographic and economic proximity to Russia explains the stronger impact. Aside from the risk that an escalation causes the war to spill further into Europe, reliance on Russian energy means Europeans will face high prices and potential energy shortages if the EU presses ahead with plans to reduce its reliance on Russian energy by two thirds this year.

Energy

The US agreed to supply the EU with more energy last week, as Europe tries to reduce its consumption of Russian energy. The US, and other countries, will supply an extra fifteen billion cubic metres of gas to Europe, taking total US supply to 37 billion cubic metres, equivalent to 24% of the gas currently being imported to the EU from Russia. US supply is to rise, with the EU looking to take a total of fifty billion cubic metres until 2030. To meet the rest of the demand, Europe is looking at using existing nuclear and coal power stations for longer, accelerating green initiatives and reducing usage, as well as further energy imports. While US imports will ensure some supply, the cost will still be high, as gas imports are in demand globally. Nonetheless, there is a political will to make this sacrifice, with European Commission President Ursula von der Leyen confirming a desire to “diversify away from Russia towards suppliers that we trust, that are friends, and that are reliable.”

Russia

Russian President Vladimir Putin last week demanded that "unfriendly" countries buy Russian gas in rubles, and suggested the measure could be widened to other commodities as well. Currently, gas is mostly paid for in euros or dollars. Overseas buyers would need to buy rubles ahead of any purchase, but sanctions imposed on Russian banks would make this difficult. The move could give state owned banks more control over foreign currency holdings in Russia, but may make life more difficult for Russia’s gas firm Gazprom.

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