It is increasingly looking as though austerity is returning – in spades and redoubled. We’ll learn more, of course, once the delayed autumn statement is released, but it is unlikely to contain much of cheer, with spending cuts and tax rises expected. Still, the return of fiscal prudence did help restore confidence in investors and, despite increasing concerns over the strength of our economy and the cost of filling the gaping hole that has appeared in the public finances, markets held up reasonably well.
A week or so ago we were languishing below 7000 for the FTSE 100 Share Index, but shares rallied and a more positive trading saw this benchmark index climb above 7200. The greater apparent stability on the political front did help, with markets overall greeting the Sunak/Hunt combination as a plus. However, the double whammy of interest rises on both sides of the Atlantic saw investors adopt a more cautious approach, handing back much of recent gains.
This week saw both America’s Federal Reserve Bank and our own Bank of England raise rates by an unprecedented 75 basis points as they endeavour to combat inflation. This has done no harm to the pound, which has recovered the ground lost when Kwasi Kwarteng’s mini budget spooked markets. But the rather downbeat assessment from the Bank of England on our economic prospects has rather taken the shine off earlier enthusiasm
Soaring profits from BP, which followed on from Shell’s equally impressive numbers, has rekindled calls for a windfall tax. Even President Biden has commented on the vast profits being made by the oil majors and has suggested they can do more to help consumers by keeping prices down. Mining shares have also enjoyed a resurgence recently in the hope that Chinese economic activity will now pick up, though the slowdown there has led many commentators to doubt this populous nation’s ability to overtake America as the world’s largest economy any time soon.
So we enter the closing weeks of the year with an uncertain future facing investors. The good news is that markets clearly have more faith in the new administration in Downing Street. The bad news is that successive policy changes have left a mess which Chancellor Hunt will find tricky to clear up, without adding to the pain being felt by consumers. The situation is hardly helped by the fact the rest of the world faces problems brought about by the inflationary pressures that emerging from the pandemic created and which were pushed into overdrive by Russia’s invasion of Ukraine. Messrs Sunak and Hunt have their work cut out for them.