Winter is coming and is practically upon us and the recent mild weather in the UK has been a distraction from what the real deal is. We care less about the weather in this article and more about the economy and investing (sure you knew that by now) so let’s dig further and see what this winter has in store.
In this article we explore the major factors that are making this winter one to pay close attention to, any opportunities that may be created from these and what can be done about it.
Inflation: What is it and Why is it still High
Inflation is still with us and despite statements from the Fed earlier stating that inflation was transitory, it appears to have gotten worse – the pressure on the Fed is getting worser and worser (meme).
Inflation as we explained here, destroys the purchasing power of your money and as we are often told, the people with the least (financial assets) are hit the hardest. Question is why?
Rising inflation will continue to be a problem for these reasons:
- There is less supply for the items we need and the demand has not waned.
- For the little supply there is, we are having to pay more money to acquire those item.
- Wages have not kept up with the high cost of items so the little money people have, is being spent to acquire the fewer items there are.
The Central Banks are looking at ways to curb inflation without bringing the economy to a grinding halt and that is not an easy task. If interest rates are raised too high, people will be unable to make big purchases and the cost of borrowing goes up.
The cost of borrowing simple means the borrower of a loan gives up more of their earnings, to pay off the loan. This applies to any loans such as mortgages, or business loans.
Secondly, the effects of rising inflation in now seeping into other aspects of the economy such as the job market, housing and the cost of living – which is another beast of its own.
Unless this inflation beast is tamed, we will keep having to pay more money for basic necessities and it is worth remembering many employers are not soo keen to pay wages that keep up with inflation. As a matter of fact, there has been a number of job cuts and it looks like there is more to follow.
Cost of Living Crisis: What is it and What Caused it
The cost of living crisis is the second act in this play and its impact is exacerbated by high inflation.
The price of fuel has increased meaning we pay more for food, keeping our homes warm and almost any thing that is deemed not necessary for living. Hence the term, cost of living.
Almost everything you purchase in a store or online was transported or shipped – and this uses fuel. Since the cost of fuel has gone up, the price of these items (some of which are everyday items we need), has gone up.
Inflation plays a role in this crisis too because companies simply transfer the increased cost to the consumer since they need to remain profitable.
It now costs more to transport our food items from different locations and that extra cost is shifted to the consumer since companies need to maintain their margins and competitiveness.
Renters are also struggling in this crisis for a number of reasons. As inflation bites, the central banks have raised interest rates and this increase the cost of borrowing (the repayment on these loans).
This increase in cost is transferred to . . . yes you guessed right, to the renter (consumer in this case). So the person renting has not seen their wages rise to the same degree as inflation, is paying more for food and has to now pay more to keep a roof over their heads. Yikes.
First time buyers are also bearing the brunt of the cost of living crisis. In some cases, bank of mum and dad is not stretching far enough. In the UK house prices are set to fall; bearing in mind in depends on the area and to what degree.
This presents an opportunity for first time buyers however since the Liz Truss mini budgets fiasco, the cost of borrowing and removal of certain mortgage products meant first time buyers are still unable to get on the property ladder.
Not the most optimistic of pictures however this is how things are shaping up.
Geopolitical Factors: Russia, Ukraine, North Korea and China
The ongoing war in Ukraine does not appear to be resolved anytime soon despite recent gains by the Ukrainian forces. This will be the first winter of this conflict and it is interesting to see how things play out.
An important aspect of this to note is that there was rising inflation even before the Ukraine conflict – worth remembering especially when politicians (true to their nature) shift blame.
The conflict in Ukraine has made the inflation story much worse because Russia cut its gas supply to Europe and as we know, Europe gets a large portion of its gas from Russia.
European companies are paying much more for gas and many of these companies are on the brink of bankruptcy or are barely surviving. Juniper is one of those companies that had to be bailed out by the German government.
Gas or and Energy are the lifeblood of any modern economy and this conflict shows how it is being used to gain political leverage.
There are other geopolitical factors such as the growing tensions between China and Taiwan, North Korea launching even more missiles and Saudi Arabia considering joining BRICS – did not see that one coming at all.
While these tensions are developing at their own pace, for now, they have no direct bearing on what is happening this winter and in our homes in the UK so we will leave it there.
The Overall Economy
Considering the points made above, it should come as no surprise that the outlook for the UK economy and EU, is not looking bright. According to the latest figures, house prices are falling and this normally would be a good thing for first time buyers however, borrowing conditions are more strict, wages have not kept up with inflation and there are job losses across sectors of the economy. So a slight decline in the prices of houses may not be good news for everyone.
The UK economy is in a recession that could last up to two years according to latest reports. The Chancellor has released the Autumn Statement and one of the big take aways is that more people, will pay more tax. The IMF after criticising the Liz Truss’s mini budget, applauded the steps taken by the current Chancellor as it provides the UK with much needed tax income.
Since the outlook for the UK and EU is bleak, this is reflected in the GBP and EUR currencies respectively when compared with the USD. During the mayhem, the GBP fell heavily against the USD and it only improved after the Bank of England intervened. Things are not that bad the moment but they are not any better.
The impact of the intervention carried out by the government will take some time to be reflected in the economy and those indicators will reveal how well it is working.
Summary
This winter is unlike any in recent memory since there is a confluence of forces that can set the economic course especially in Europe for a few years to come. China’s zero covid policy and the ensuing lockdowns are impacting supply chains.
A part of the economic outlook for the UK also depends on Brexit and politicians and voters alike are reluctant to admit it but the evidence is there.
The OECD report here show the world economy is slowing down and the OBR report here shows more detailed facts and figures. Worth a read.
There are opportunities in the energy and consumer staple industries. Energy companies have made huge profits in the past year and those benefits are transferred to the shareholders.
