As UK government gilt yields reach levels not seen in over a decade, the FT is reporting that the UK government is set to have the highest debt interest bill across the developed world. This comes as the Treasury is expected to fork out £110bn in interest payments this year, as its debt-to-gdp level soars into triple digits. This £110bn figure is well over the amount that the UK is projected to spend on defence (£68bn) or transport (£62bn) and is roughly 1/3rd of the social security bill. According to the FT, “at 10.4 per cent of total government revenue, that would be the highest level of any high-income country — the first time the UK has topped the data set that goes back to 1995 — after an improvement by the prior leader Iceland.”
As we looked at last week, the rising cost of servicing the UK’s national debt was a key topic of discussion in the OBR’s risk outlook which descried how the rise in global inflation brought little net benefit to the UK insofar as the country’s public finances are concerned. In theory, higher inflation should increase nominal tax revenues (particularly if people are shifted into higher tax brackets), while also reducing the real value of debt. However, the OBR notes that the “UK, in particular, experienced the ‘wrong sort of inflation’ in 2022 with RPI and CPI (which drive increases in index-linked debt, pensions and working-age welfare payments) rising far more than both average earnings (a key driver of tax revenues) and the GDP deflator (the measure of inflation used to calculate nominal GDP).” Given that around 25% of the UK’s national debt is related to index-linked bonds, this ‘far from transitory’ inflation has thus continued to cause a major headache for the Treasury.
Last month the UK’s debt-to-GDP exceeded 100% for the first time since 1961 with the government deficit feeding into the £2.6tn national debt pile. As such, markets, economists and policy makers are closely monitoring UK gilt yields, as future fiscal and monetary conditions remain a hot topic of debate.
UK PIMI also came in considerably softer-than-expected, with the Manufacturing index raising eyebrows as it came in at 45pts. This came against expectations of a 46.1pt print and is indicative of the difficulties facing the manufacturing sector following 12 consecutive months of decline. While the UK remains the ninth largest manufacturing nation in the world, analysis from Make UK yesterday suggested that the share of EU trade for English and Welsh factories has fallen.
Speaking more generally on yesterday’s UK PMI print, S&P stated that “rising interest rates and the higher cost of living appear to be taking an increased toll on households, dampening a post-pandemic rebound in spending on leisure activities. Meanwhile, manufacturers are cutting production in response to a worryingly severe downturn in orders, both from domestic and export markets.”
Yesterday, grain prices continued to climb following another Russian attack on one of Ukraine’s largest ports on the Danube, rising supply-side concerns. This comes as Russia scales up its activity in the Black Sea following its decision to pull out of an agreement that allowed safe passage of crops by sea out of the Ukraine. As concerns also mount around the impact of heat waves across Europe and North America, Monday’s session saw wheat futures for a September delivery rise 8.6%, edging on four-month highs.
Yesterday’s S&P Global US Composite PMI declined to 52pts, coming in softer-than-expected and marking the lowest print since February. This came as services softened to a five-month low as manufacturing also eased to 45pts. The weak print also came as input prices decreased to their lowest level since October 2020, indicative of easing inflationary pressures across the world’s largest economy with energy prices subsiding. Nevertheless, while input costs eased, output charge inflation marginally increased.
With higher-than-expected demand from China and supply side concerns weighing on investors, WTI crude futures rose to their highest level in three months during yesterday’s session. Prices rose above $79 per barrel, appreciating 2.3% up on the day, and marking a 13.4% increase on the month. As we looked at last week, Beijing are poised to introduce fiscal measures to help boost the flagging Chinese economy, helping to feed bullish demand side sentiment. With China being the largest importer of crude oil (accounting for around 25% of the world’s total import), any prospect of increased demand from the world’s second largest economy will likely attract considerable attention. However, investors also remain cautious going into the Fed’s interest rate decision (tomorrow) and the ECB’s (on Thursday).
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