Morning Update

Last week, the UK government published the National Risk Register which detailed their views on the risk landscape of the country. The publication of the 191-page document seeks to prepare the country for some of the “worst-case” scenarios of threats ranging from terrorism and cyber-attacks to failures of the country’s energy and transportation infrastructure. The report also looks at risks that threaten to damage the UK’s commercial landscape as well as looking at natural hazards, public disorder and conflict.

As the introduction outlines, “these scenarios are not a prediction of what is most likely to happen, instead they represent the worst plausible manifestation of that particular risk (once highly unlikely variations have been discounted).” As such, the government hopes that this will catalyse bodies to undertake relevant planning, to help safeguard the country’s security.

With the report being the first published this side of the outbreak of the Covid-19 pandemic, the government spent considerable time looking at the risks associated with pathogens. Regarding a pandemic, page 161 of the report stated that “the reasonable worst-case scenario is based on an unmitigated respiratory pandemic with an unassumed transmission route and a high attack rate, with 4% of symptomatic infections requiring hospital care and a case fatality ratio of 2.5%. From start to finish the emergency stage of the pandemic in the UK will last at least 9 months and potentially significantly longer. Response mechanisms are likely to be required beyond 9 months to manage the chronic stage of the risk and longer-term recovery.”

Some other risks that may be worth noting include the total loss of transatlantic telecommunication cables, disruption of Russian gas supplies to the Europe, and Food supply contamination. In the case of the former, the government states that it could take several months depending on the circumstances to get back the UK’s telecommunications back up and running up. Meanwhile, with the government estimating that that food borne pathogens are responsible for 2.4 million cases of disease in the UK each year (costing £9.1 billion), a widespread contamination could delver a much larger concern to the health and stability of the nation.

The full report can be read here.

Yesterday the Bank of England’s Chief Economist, Huw Pill gave markets some insight into his views on UK economic conditions. Pill indicated that inflation still remains too high while the full impact of the BoE’s monetary tightening course is yet to be felt. Pill – who is generally considered to land on the hawkish side of monetary policy – also suggested that it may take several years for inflation to fall back to Threadneedle Street’s target level.

One area of consumer prices that may feed into this is persistently high food prices. Here, Pill stated that “unfortunately, the days of seeing food prices fall — that does seem to be something that we may not be seeing for a little while yet if in the future at all”. He continued by projecting that food price inflation will fall to around 10% by the end of the year, while suggesting that this will still put pressure on households. The central bank has indicated that long-term supermarket contacts have been feeding into higher bills at the supermarket in instances where they lock in high costs. Pill also noted that food prices may continue to remain elevated despite falls in wholesale commodity prices.

German headline inflation (annualised) has eased to 6.2% in July, from 6.4% in June. This marks a considerable fall from the 8.8% levels seen in October and November last year and is only 10bps of the lowest level seen in 14-months. Core inflation also eased to 5.5%, and comes as the German economy remains in a period of stagnant growth. Last quarter, we learnt that the German economy contracted 0.3% during the first quarter of 2023 which following a contraction of 0.5% seen over Q4 2022, meant that Europe’s largest economy entered a technical recession. With inflation easing in line with expectations, investors are weighing up the ECB’s next move, with many considering whether Frankfurt will pause their monetary tightening cycle.