Whisper it quietly, but the sacking of Chancellor Kwasi Kwarteng and announcement of new plans outlined by incoming Jeremy Hunt appear to have created much calmer economic and financial market waters in the UK.
More specifically, both the pound (GBP) and government bond yields have recovered from their recent nadir, following news that the 45p tax rate for higher earners was to be maintained and Hunt’s recent announcement that corporation tax would increase to 25% next April (rather than being kept at 19%).
But will this lead to a more stable economy and increased investment in cities like Manchester, or could the economic climate worsen before it improves?
Exploring the Effects of Rising Inflation and Interest Rates
The UK has certainly found itself in the midst of a perfect macroeconomic storm of late, with inflation having increased markedly following Russia’s invasion of Ukraine (and the subsequent changes to the supply and price of oil) and ongoing supply chain complexities caused by Brexit and the coronavirus pandemic.
With inflation having peaked at 10.1% in July and likely to reach 11% in the winter, the Bank of England (BoE) has sought to counter this by continually hiking the base interest rate. This is based on the notion that inflation and interest rates enjoy an inverse relationship, with a higher base rate encouraging households to save and reducing spending naturally.
While this may well prove to be effective over time, there are a couple of points to keep in mind. Firstly, it’s most effective when the rate of inflation is at least to the 2% target set by the BoE, as minimal increases are required to have the desired effect.
Secondly, the decision to hike rates is compounding the cost-of-living crisis for many households and businesses, making it harder and more expensive to borrow while diminishing reinvestment even into prosperous urban areas.
What are the Effects of a Weak Pound?
As inflation mounts and the cost of borrowing soars, the purchasing power of currencies (in this instance, the pound) declines accordingly.
This makes the GBP considerably less appealing in the eyes of investors, particularly those from overseas. This also impacts on British businesses over time, making it harder to source investment in an increasingly uncertain and volatile climate.
Once again, such uncertainty is being exacerbated by Brexit and ongoing supply chain issues, creating a scenario where some investors may seek flight and explore more prosperous, emerging markets.
The good news is that a weakened pound also makes UK stocks and assets much cheaper, so working closely with an expert investment manager can help you to make sound choices.
What’s the Outlook for 2023 and Beyond?
Currently, the intervention of new Chancellor Jeremy Hunt appears to have steadied the ship, although this also undermines the PM’s position and could create more geopolitical volatility going forward.
Certainly, the decline of the pound has been partially reversed, while the BoE may be able to hike the base rate at a steadier pace in the near and medium term.
Still, the central bank has warned that inflation could stay at double digits for much of 2023 at least, ensuring that the short-term investment outlook in Manchester and nationwide is relatively bleak.
An economic recovery could be on the cards in 2024, but careful management and informed decision-making will need to be taken for this to take shape.
