Bank of England
Andrew Bailey once again warned that the Bank of England will have to act to contain inflation, when he spoke yesterday, saying “monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to the medium-term inflation and medium-term inflation expectations… and that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act”. That statement has led to speculation that we could see a rise next month now, instead of the expected December hike. The statement also alludes to another interesting point in that they don’t only want to control inflation, but also manage the expectations to the market that they are acting to contain the problem, as there may be concern amongst investors and consumers that if the Bank aren’t willing to jump on this then perhaps they should sort their own defensive strategies out which might then weigh more heavily on economic output. This then brings a third concern into play; are the Bank of England right to act with interest rate rises or are they making a wrong move? There’s an outlying theory that with fiscal policy tightening through tax rises and consumption possibly slowing because of inflation, there is already a brake on the economy and a hiking cycle that runs too quickly could become detrimental! Confused? Us too, but it does demonstrate the tight rope that central banks are going to have to walk over the coming months.

UK Tax Rises
Speaking of tax rises: Rishi Sunak is accelerating plans to launch an online transaction tax. The levy on web purchases is designed to level the playing field between online and bricks and mortar retailers and is touted at being 2% – a number that Philip Hammond suggested when he was chancellor a few years ago. The move is part of a larger business rates overhaul that the Treasury is working on and is likely to be announced after the budget, which is due next week.  The tax could raise in excess of £2bn a year, which would be well received by the exchequer if they make revisions to VAT elsewhere…

They’re considering cutting the VAT rate on a temporary basis in a bid to help household finances over the winter. Currently VAT is set at 5% and that was the EU set floor on how low this consumption tax could go, but with us out of the EU, Boris will be keen to get a reduction in place and tout it as a windfall for leaving the Union. The optics of making such a cut ahead of COP26 aren’t great though, as it is effectively increasing the government subsidy to natural gas, as they’d have to allocate more money from elsewhere to fund the infrastructure. Additionally, the cut in VAT would also benefit larger houses, and therefore larger income households, more which would be contentious because the increase in National Insurance disproportionately hurts lower income households, which seems unfair.

The FT has more

Growth in China
There are signs of the seismic growth in China, starting to faulter. Economic growth last quarter was stunted, due to a major housing slump and electricity shortage, which is likely to be exacerbated as we head into the winter period. Despite gross domestic product expanding by a meagre 4.9% from a year earlier, this is down from 7.9% in the previous quarter, which was largely what forecasters had predicted. The country’s growth is likely to continue along this trajectory, with Beijing intimating that they are not in any rush to stimulate the economy, which is likely to have a cascading effect, as their usual high demand for construction related commodities would diminish. The epicentre of this issue can be located around the Evergrande Group, as Beijing have been trying to reduce the financial risks around the real estate sector by slowing the pace of lending, which accounts for around 25% of GDP, once other industries related are factored in. China know that their economy has multiple facets which can be relied on, export growth surged in September, while retail sales also grew, and unemployment fell slightly. The word transitory has been utilised in many formats recently, specifically regarding inflation in every jurisdiction going, however there is an argument to say the slow down in growth could be just that, and will likely pick up, once the economic imbalance is corrected, which would explain why China are reluctant to pump significant stimulus into the economy to arrest the slowdown.

Vulnerable European Economy?
European Central Bank President Christine Lagarde has highlighted how vulnerable the European economy is at the minute, pointing to how the globalized nature of the economy is susceptible to systematic shocks from supply chain disruptions, a similar issue which has been widely reported here in the UK. Bottlenecks affect the “euro area more than other economies by virtue of our exposure to globalization,” she said. The issues relate to the ‘just-in-time’ inventory management, a philosophy of reducing inventory, and increasing efficiency. Due to the nature of this approach, you really only hold enough inventory for your needs over the short term, which means that should there be any major transport issues, such as shipping delays or a lack of lorry drivers, then you are likely to be without key components to operate and would have to scale back output, which is the current situation globally right now. Lagarde’s point is that the dynamics of trade are likely to change dramatically, with firms making a concerted effort to hold more stock, as an insurance policy to any further transport disruptions, which in turn has percolated through the market causing import volatility to increase, not decrease.
Have a great week.
This Morning Report was brought to you by Alex Ayoub


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