Bad News from the Bank of England and Tips to Avoid the Worse

I watched Andrew Bailey, Governor of the Bank of England, present the bad news yesterday about the economy. Inflation is likely to rise to 13% and he is forecasting the economy will soon be in recession, with household incomes falling over the next year. With inflation being driven by the war in Ukraine affecting energy prices the Monetary Policy Committee has decided to increase Bank Rate by 0.5 percentage points to 1.75% to try and get back to the target of 2% inflation.

With mortgage rates rising and the cost of living rising while there will be downward pressure on wages relative to costs most people are going to be poorer over the next year. There may not be a recovery until 2024.

What was the impact of this gloom on the stock market? Very little in essence. The main UK market indices actually rose yesterday as did my personal portfolio. Perhaps because the bank interest rate rise had been widely forecast and it’s still at a historically low rate. Sales of consumer durables, furniture and carpets – big ticket items for which purchases can often be postponed – will surely fall but the share price of companies selling those products have already fallen over the past few weeks.

The UK stock market is of course dominated by companies with revenue and profits mainly arising overseas while banks will tend to benefit from higher base rates and energy companies are making hay from the high prices of oil and gas.

The conclusion for investors is if you have spare cash on deposit don’t leave it there because its value will shrink. Give it away or spend it on home improvements as we will be doing – particularly to cut your energy consumption. If you do want to put some into the stock market, go for companies who have indexed linked revenue (such as some property companies and alternative energy investment companies) or who have pricing power (i.e. can raise their prices without losing volume). Avoid investing in fixed interest securities such as Government bonds who are benefiting from the erosion of their debts.

Here’s a tip for business owners I learned from past recessions. If you are faced with a loss of revenue in a recession, you should be raising prices not lowering them, i.e. don’t react like your competitors might do to try and win more business. With less revenue and the same overheads you need to raise prices not lower them so avoid following the herd.

As regards giving money away, it is worth bearing in mind the potential Inheritance Tax liability. There was a very useful article in Investor’s Chronicle headlined “What does HMRC mean by gifts from surplus income?” a couple of weeks ago. Gifts from surplus income are exempt from IHT and the IC article explained the rules that apply.

It’s worth doing it regularly but you need to keep a record of all income and expenditure and tot it up at the end of each tax year to ensure you keep within the limit if you are giving money to offspring. I have been recording all personal income and expenses for the last 50 years, now in a spreadsheet, so I have the data readily to hand. This might seem rather manic to some people but even John D. Rockefeller, probably the richest person of all time and certainly in the 1920s, used to record all his personal expenditure, even tips to taxi drivers, in a notebook according to a biography I read.

Gifts to spouses or charities are exempt from IHT of course.

Let us hope the Bank of England is no more accurate in its economic forecasts than it usually is but it’s certainly been looking incompetent at controlling inflation of late. My view is that printing money to keep the economy afloat and protect the NHS during the pandemic was the cause of the inflation compounded by the impact of the imported energy costs.

The lack of a UK energy policy to keep the lights on and gas flowing has been a big cause of our difficulties. Lack of investment in nuclear energy plus restrictions on fracking and new gas exploration due to a rush to achieve net zero carbon have been very damaging.

For more details on the gloomy bank forecasts see: https://www.bankofengland.co.uk/monetary-policy-report/2022/august-2022

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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