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Tuesday, June 28, 2022

UK borrowed £14bn in May as inflation drove up interest debt costs – business live | Business

Introduction: Rising debt costs add to UK borrowing in May

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The UK government borrowed more than expected to balance the books last month, as rising inflation pushed up the cost of servicing the national debt.

May’s public finances, just released, show that the public sector spent more than it received in taxes and other income. This required it to borrow £14bn, £3.7bn more than the independent Office for Budget Responsibility (OBR) forecast — and ahead of City forecasts of a £12bn monthly deficit.

That’s £4bn less than a year ago, due to the drop of pandemic spending such as the furlough scheme, and Test and Trace. But it’s £8.5bn more than in May 2019, before the coronavirus (COVID-19) pandemic.

As this chart shows, it’s the third-highest May borrowing on record (after 2020 and 2021).

UK government borrowing
UK government borrowing Photograph: ONS

Tax take increased year-on-year reflecting the reopening of the economy; Value Added Tax revenues were up 10%, and Business Rates bringing in 13% more than a year ago. That helped to lift tax receipts to £48.3bn, an annual increase of £3.4bn.

But interest payments on the UK national debt jumped by 70% compared with a year earlier. Britain spent £7.6bn on debt repayments, around £3.1bn more than a year ago when it cost £4.5bn.

That’s because the payments on some UK government debt, or gilts, are linked to the retail prices index measure of inflation (which hit 11.7% last month, we learned yesterday). So as the cost of living increases, so does the interest bill on the national debt.

The ONS says:

On an accrued basis, this month saw the third highest debt interest payment made by central government in any single month and the highest payment made in any May on record.

UK borrowing
UK borrowing Photograph: ONS

May’s borrowing lifted the national debt (excluding public sector banks) to £2.36 trillion, or around 95.8% of GDP.

Michal Stelmach, senior economist at KPMG UK, warns that “debt reduction this year remains a long shot”, given Rishi Sunak’s £15bn cost of living support package will add to borrowing.

“The pace of deficit reduction is set to slow over the coming months, with the government’s latest package of cost of living measures providing a net fiscal loosening worth 0.4% of GDP in 2022-23. We expect borrowing to overshoot the OBR’s March forecast by around £20bn this year, largely on account of higher spending and weaker economic growth.

“The debt profile will depend on the economic outlook which faces acute downside risks in the near term, while rising demand for healthcare coupled with falling working-age participation could also impede fiscal sustainability. We now expect public sector debt to peak in 2023-24, missing the OBR’s March forecast by two years.

Also coming up today

New surveys of purchasing managers in the UK, eurozone and US will show whether growth is slowing this month, as worries about a possible recession rise.

Millions of UK rail passengers faced another day of disruption as this week’s second strike begins. The rail industry is asking people to only travel if necessary today, with fewer than one in five trains in Great Britain expected to run.

With UK inflation hitting a 40-year high of 9.1% last month, industrial unrest could spread as the government faces more calls for pay rises that reflect the cost of living.

The country’s biggest teaching union is warning of strike action this autumn without an “inflation plus” deal.

Norway’s central bank is expected to raise interest rates, from 0.75% to 1%, while the Central Bank of the Republic of Turkey could leave rate on hold at 14%.

The agenda

  • 7am BST: UK public finances for May
  • 9am BST: Eurozone ‘flash’ PMI survey of manufacturing and services for June
  • 9am BST: Norges Bank interest rate decision
  • 9.30am BST: UK ‘flash’ PMI survey of manufacturing and services for June
  • 11am BST: CBI distributive trades survey of UK retail
  • Noon BST: Turkish central bank interest rate decision
  • 1.30pm BST: US weekly jobless claims report
  • 2.45pm BST: US ‘flash’ PMI survey of manufacturing and services for June

Full story: UK borrowed £14bn in May as inflation drove up interest debt costs

Phillip Inman

Phillip Inman

Government borrowing was higher than expected in May at £14bn as soaring inflation sent interest payments on the UK’s debt to a monthly record, my colleague Phillip Inman writes:

The Office for National Statistics (ONS) said debt interest payments leapt 70% on a year ago to £7.6bn, the third highest debt interest payment made by central government in any single month and the highest payment in May on record.

Some economists said the increase in borrowing and the UK’s slowing economy was likely to push government borrowing £20bn higher this year than the Office for Budget Responsibility (OBR), the Treasury’s independent forecaster, expected at its last estimate in March.

Paul Dales, chief UK economist at the consultancy Capital Economics, said:

“With the economy weakening and interest rates rising, the public finances will probably perform worse this year than the OBR forecast.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the extra spending by the government to protect low-income families and pensioners from inflation would also dent the public finances in the second half of the financial year.

“Accordingly, we think that public borrowing will total about £130bn this year, well above the OBR’s £99bn forecast.

June’s ‘flash PMI’ report shows that the eurozone economy is slowing fast, explains Chris Williamson, chief business economist at S&P Global Market Intelligence:

“Eurozone economic growth is showing signs of faltering as the tailwind of pent-up demand from the pandemic is already fading, having been offset by the cost of living shock and slumping business and consumer confidence.

Excluding pandemic lockdown months, June’s slowdown was the most abrupt recorded by the survey since the height of the global financial crisis in November 2008.

The slowdown means the latest data signal a rate of GDP growth of just 0.2% at the end of the second quarter, down sharply from 0.6% at the end of the first quarter, with worse likely to come in the second half of the year. Inflows of new business have stalled, led by a slump in demand for goods and reduced demand for services from cash-strapped consumers in particular.

Eurozone business growth slumps as rising prices hit firms

Euro zone business growth has slowed sharply to a 16-month low, as demand stalled and rising prices hit customer spending.

S&P Global’s flash Composite Purchasing Managers’ Index (PMI) has slumped to 51.9 in June from 54.8 in May, weaker than expected, and the lowest level since February 2021.

Manufacturing output contracted for the first time in two years and service sector growth cooled, particularly for consumer-facing services.

This will reinforce concerns that rising prices could push the eurozone into recession, after inflation hit a record high of 8.1% in May.

Eurozone growth slumped to a 16-month low in June, according to #PMI flash estimates, with the headline index dropped to 51.9 (May: 54.8). Demand levels stalled whilst goods production fell for the first time in 2 years. Read more: https://t.co/C8Mzmh43EW pic.twitter.com/3rfCVEmTSB

— S&P Global PMI™ (@SPGlobalPMI) June 23, 2022

An index of new business dropped to a 16-month low of 50.0 — the dividing line between growth and contraction.

With growth slowing, companies scaled back their expectations for output over the coming year to the lowest since October 2020 – just before the first Covid-19 vaccine results.

The report says:

Both the stagnation of demand and worsening outlook were widely blamed on the rising cost of living, tighter financial conditions and concerns over energy and supply chains linked to the Ukraine war and ongoing pandemic disruptions.

Price pressures meanwhile remained elevated at levels not seen prior to the pandemic, though a moderation of cost growth for a third successive month hinted at a peaking in the rate of inflation.

Flash PMI data out of Europe this morning is grim, with the French and German metrics coming in below the analyst forecast range, pretty much. $EUR pressured ahead of the release of the Eurozone-wide metrics in around 30 mins.

— Newsquawk (@Newsquawk) June 23, 2022

Private sector growth in both Germany and France has slowed sharply this month, which will fuel concerns that Europe’s economy is faltering.

In France, growth has slumped to its weakest since the peak Omicron disruption at start of 2022, the latest survey of purchasing managers shows.

In Germany, growth slowed for the fourth month in a row to a six-month low, signalling a “sustained loss of momentum in the private sector economy”.

We get the eurozone-wide PMI report in about 20 minutes….

The copper price has dropped to a 16-month low this morning, as concerns rise over a rise in Covid-19 cases in key consumer China and aggressive US interest rate hikes.

Copper is seen as a barometer of economic health; if the global economy dropped into recession, demand for metals would be dented.

Three-month copper on the London Metal Exchange is down over 1% at $8,673 a tonne, Reuters reports, after dropping to its lowest since February 19, 2021, at $8,564.50.

The pound is also weaker this morning, dropping by half a cent against the US dollar to $1.22.

Recession fears weigh on markets

A recession would put fresh strain on the UK public finances, knocking tax revenues and pushing up welfare spending.

And worries about an economic downturn have knocked European stock markets at the start of trading.

In London, the FTSE 100 index has shed 70 points, or 1%, to 7018 points, back towards last week’s three-month low. Mining companies are among the fallers.

Germany’s DAX has lost 0.5%, with France’s CAC 0.6% lower and Italy’s FTSE MIB down 1%.

🔔 European Opening Bell 🔔

🇬🇧 FTSE 100 down 0.5%

🇪🇺 STOXX 50 down 0.7%

🇪🇺 STOXX 600 down 0.7%

🇩🇪 DAX down 0.4%

🇫🇷 CAC 40 down 0.6% pic.twitter.com/peNzOHy3lV

— PiQ  (@PriapusIQ) June 23, 2022

Investors fear that interest rate increases to fight inflation could tip economies into recessions. Yesterday, US central bank chief Jerome Powell said the Federal Reserve was fully committed to bringing prices under control, even if doing so risked an economic downturn.

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, explains:

Market optimism couldn’t survive to Jerome Powell’s testimony yesterday, as he said that a recession is possible, and that calling a soft landing is ‘very challenging’ under the current circumstances.

More worryingly, Powell mentioned another risk: the risk of the Federal Reserve not managing to restore price stability and allowing inflation to get entrenched in the economy.

The larger-than-expected rise in public borrowing in May is an early blow for the government on a day when it is expected to lose two by-elections, says Paul Dales of Capital Economics:

What’s more, the combination of a further weakening in economic activity and more interest rates rises will probably mean that borrowing overshoots the OBR’s 2022/23 forecast of £99bn by at least £10bn.

That will limit the ability of the Chancellor to cut taxes and/or provide more grants to households when the cost of living crisis worsens later this year.

Here’s Bloomberg’s take:

The UK government borrowed more than forecast in May after a 70% surge in interest payments to service the national debt.

The budget deficit stood at £14 billion, £2 billion higher than economists had forecast. Overall government spending was higher than the Office for Budget Responsibility predicted in March, and receipts lower.

Higher interest rates and inflation boosted the money the Treasury spends to service its debt to £7.6 billion, the most for any May on record, from £4.5 billion a year earlier. The OBR is forecasting a surge to £19.7 billion in June.

The UK government borrowed more than forecast in May, highlighting risks to the public finances as the cost of living crisis threatens to push the economy into recession https://t.co/OekfbdRm2D

— Bloomberg (@business) June 23, 2022

Public finances ‘off to a bad start’ this year

Martin Beck, chief economic advisor to the EY ITEM Club, says the public finances have made a bad start to the financial year, and could get worse.

Although the May data showed central government current receipts continuing to grow strongly, the rise was not as robust as the OBR had anticipated. Similarly, the fall in central government spending was less steep than the OBR expected, with the impact of very high inflation on debt interest payments a factor.

“With April’s outturn revised up significantly, fiscal year 2022-2023 has got off to a disappointing start – borrowing over the first two months of the fiscal year was £6.4bn above the OBR’s forecast. The borrowing data is notoriously revision-prone, so this picture could change. But a further decline in the public finances looks likely as we move through the fiscal year.

A slowdown in economic growth could also hit tax revenues, Beck adds:

Growth in receipts is likely to come under increasing pressure from faltering activity

At the same time, government spending is set to come in well ahead of the OBR’s March forecast given that inflation and interest rates will be much higher, and the cost of the Government’s recent fiscal support package is yet to be incorporated into the OBR’s forecasts.

As a result, the EY ITEM Club expects borrowing to come in some way above the OBR’s March projection.

Sunak: Rising inflation and debt interest costs challenge the public finances

Chancellor of the Exchequer, Rishi Sunak, has warned that rising inflation is a challenge to the public finances:

“Rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets.

“That is why we are taking a balanced approach – using our fiscal firepower to provide targeted help with the cost of living, while remaining on track to get debt down.

“Being responsible with the public finances now will mean future generations aren’t burdened with even higher debt repayments, and we can secure our economy for the long term.”

As this chart shows, UK borrowing is running ahead of forecasts this financial year (since April), and is higher than before the pandemic:

UK government borrowing
UK government borrowing Photograph: ONS

The cost of servicing UK government debt has increased considerably in recent months as inflation pushes up the interest paid to holders of RPI index linked gilts, explains Fraser Munro, public sector finance statistician at the ONS.

He’s pulled together the key points from May’s borrowing figures:

In May 2022, the public sector spent more than it received in taxes and other income, requiring it to borrow £14.0 bn, £4.0 bn less than in May last year and the third-highest May borrowing on record.
This thread provides the story behind the headlines.https://t.co/4v9zRKGQE3 pic.twitter.com/NMkVqY9bQH

— Fraser Munro (@Fraser_ONS_PSF) June 23, 2022

Central government income was £66.6 bn in May 2022, £5.7 bn more than in May last year. These receipts include £48.3 bn in taxes and £14.4 bn in compulsory social contributions (largely National Insurance payments). pic.twitter.com/EpdUOeDz11

— Fraser Munro (@Fraser_ONS_PSF) June 23, 2022

Central government current (or day-to-day) spending was £74.0 bn in May 2022, £2.2 bn less than in May last year, with a £3.1 bn rise in debt interest being offset by a £4.9 bn fall in subsidy payments. pic.twitter.com/F36imunTZm

— Fraser Munro (@Fraser_ONS_PSF) June 23, 2022

The cost of servicing government debt has increased considerably in recent months as inflation pushes up the interest paid to holders of RPI index linked gilts. OBR expect interest payments to hit £19.7 bn in June, dwarfing the previous record of £9.1 bn recorded in June 2021. pic.twitter.com/vDeIt7rAkn

— Fraser Munro (@Fraser_ONS_PSF) June 23, 2022

The additional borrowing in April has pushed the financial year-to-date total up to £35.9 bn. Although £6.4 bn less than in the same period last year, borrowing is £19.8 bn more than in the same period in pre-pandemic 2019. pic.twitter.com/ijlMpSofBr

— Fraser Munro (@Fraser_ONS_PSF) June 23, 2022

Introduction: Rising debt costs add to UK borrowing in May

Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.

The UK government borrowed more than expected to balance the books last month, as rising inflation pushed up the cost of servicing the national debt.

May’s public finances, just released, show that the public sector spent more than it received in taxes and other income. This required it to borrow £14bn, £3.7bn more than the independent Office for Budget Responsibility (OBR) forecast — and ahead of City forecasts of a £12bn monthly deficit.

That’s £4bn less than a year ago, due to the drop of pandemic spending such as the furlough scheme, and Test and Trace. But it’s £8.5bn more than in May 2019, before the coronavirus (COVID-19) pandemic.

As this chart shows, it’s the third-highest May borrowing on record (after 2020 and 2021).

UK government borrowing
UK government borrowing Photograph: ONS

Tax take increased year-on-year reflecting the reopening of the economy; Value Added Tax revenues were up 10%, and Business Rates bringing in 13% more than a year ago. That helped to lift tax receipts to £48.3bn, an annual increase of £3.4bn.

But interest payments on the UK national debt jumped by 70% compared with a year earlier. Britain spent £7.6bn on debt repayments, around £3.1bn more than a year ago when it cost £4.5bn.

That’s because the payments on some UK government debt, or gilts, are linked to the retail prices index measure of inflation (which hit 11.7% last month, we learned yesterday). So as the cost of living increases, so does the interest bill on the national debt.

The ONS says:

On an accrued basis, this month saw the third highest debt interest payment made by central government in any single month and the highest payment made in any May on record.

UK borrowing
UK borrowing Photograph: ONS

May’s borrowing lifted the national debt (excluding public sector banks) to £2.36 trillion, or around 95.8% of GDP.

Michal Stelmach, senior economist at KPMG UK, warns that “debt reduction this year remains a long shot”, given Rishi Sunak’s £15bn cost of living support package will add to borrowing.

“The pace of deficit reduction is set to slow over the coming months, with the government’s latest package of cost of living measures providing a net fiscal loosening worth 0.4% of GDP in 2022-23. We expect borrowing to overshoot the OBR’s March forecast by around £20bn this year, largely on account of higher spending and weaker economic growth.

“The debt profile will depend on the economic outlook which faces acute downside risks in the near term, while rising demand for healthcare coupled with falling working-age participation could also impede fiscal sustainability. We now expect public sector debt to peak in 2023-24, missing the OBR’s March forecast by two years.

Also coming up today

New surveys of purchasing managers in the UK, eurozone and US will show whether growth is slowing this month, as worries about a possible recession rise.

Millions of UK rail passengers faced another day of disruption as this week’s second strike begins. The rail industry is asking people to only travel if necessary today, with fewer than one in five trains in Great Britain expected to run.

With UK inflation hitting a 40-year high of 9.1% last month, industrial unrest could spread as the government faces more calls for pay rises that reflect the cost of living.

The country’s biggest teaching union is warning of strike action this autumn without an “inflation plus” deal.

Norway’s central bank is expected to raise interest rates, from 0.75% to 1%, while the Central Bank of the Republic of Turkey could leave rate on hold at 14%.

The agenda

  • 7am BST: UK public finances for May
  • 9am BST: Eurozone ‘flash’ PMI survey of manufacturing and services for June
  • 9am BST: Norges Bank interest rate decision
  • 9.30am BST: UK ‘flash’ PMI survey of manufacturing and services for June
  • 11am BST: CBI distributive trades survey of UK retail
  • Noon BST: Turkish central bank interest rate decision
  • 1.30pm BST: US weekly jobless claims report
  • 2.45pm BST: US ‘flash’ PMI survey of manufacturing and services for June

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