Swiss bank crash stokes fears of new global crisis

UK officials scramble to help prop up Credit Suisse as meltdown overshadows Budget

ONE OF Europe’s biggest banks sparked global market turmoil yesterday amid fears it is on the brink of financial disaster.

The Bank of England was holding emergency talks with international counterparts last night after shares in Credit Suisse plunged as much as 30 per cent, spreading fear through the City of London that overshadowed Jeremy Hunt’s maiden Budget.

Growing fears of a new banking crisis have led financial experts to begin reassessing forecasts for economic growth, with some predicting that central banks will soon have to start cutting interest rates. Credit Suisse appealed to the Swiss National Bank (SNB) for a public show of support. In a joint statement with the country’s financial watchdog last night, the SNB said that the bank’s finances were up to standard.

But it added that the bank would be propped up: “If necessary, the Swiss National Bank will provide Credit Suisse with liquidity.”

Bank of England officials were in talks last night to assess the potential effect of the problems at Credit Suisse, a “systemically important” institution, which is enmeshed in the global financial system.

Experts predicted that it would require a bailout to prevent a collapse that would rock banks and pension funds around the world.

Stock markets tumbled earlier in the day as anxieties mounted. The FTSE 100 sank nearly 4 per cent, as British banks and asset managers were dumped by investors. Prudential, the insurer, lost more than 12 per cent of its valuation, while Barclays fell 9 per cent.

Meanwhile, Shell and BP both declined by more than 8 per cent. Oil prices fell more than 5 per cent as memories of the 2008 financial crisis and its aftermath stoked fears of a global economic downturn.

The crisis was in contrast to the improving picture that the Chancellor tried to paint yesterday as he unveiled forecasts from the Office for Budget Responsibility (OBR) that showed the UK will avoid a recession this year.

Mr Hunt said the figures were “proving the doubters wrong” as the latest projections showed inflation falling to 2.9 per cent by the end of the year. He said the economy was now “on the right track” after the OBR, the Government’s tax and spending watchdog, said that any downturn would be “shorter and shallower” than predicted four months ago.

However, senior economists warned that the collapse of Credit Suisse had the potential to upend a recovery from the twin shocks of the pandemic and war in Ukraine.

Nouriel Roubini, nicknamed “Dr Doom” for correctly predicting the 2008 financial crisis, described the Credit Suisse situation as a “Lehman moment” for European and global markets. He said the bank was “too big to fail and too big to be saved”. “An economic and financial hard landing has been my baseline for over a year now. Now it is clearly unavoidable,” he added.

While the economy is expected to shrink by 0.2 per cent this year, the OBR no longer believes it will enter a technical recession – defined as two straight quarters of economic decline.

Its previous forecast showed a 1.4 per cent drop and predicted a recession lasting more than a year. However, the OBR said Britain’s tax burden remained on course to hit a post-war record.

Almost six million people are expected to be pushed into higher tax bands by the decision to freeze income tax thresholds until 2028. Andy King, a member of the OBR’S executive committee, described Mr Hunt’s tax raid as “fiscal drag on turbo chargers’’.

The watchdog also said that households still faced the biggest two-year squeeze in living standards on record.

Tory MPS warned the party risked losing the next election.

Simon Clarke, former chief secretary to the Treasury and co-chairman of the influential Conservative Growth Group, said: “I don’t think it is a good place for a Conservative government to have the highest tax burden since the Second World War. Everyone knows the country has been through difficult times, with the Government spending huge amounts of money on first Covid and then the Ukraine invasion.

“But we urgently need to have a more Conservative position on tax. There is a risk voters will not understand how a Conservative government will make their lives better.”

Investors have become increasingly worried about the global banking sector, after the collapse of Silicon Valley Bank and Signature Bank in the United States last week.

‘People are holding on to the extra money they saved on travel, lunches and going out during lockdown’

‘Falling inflation offers some respite – not enough to prevent the worst drop in living standards on record’

BRITAIN will avoid falling into recession this year as tumbling energy prices and higher immigration help the economy avoid a prolonged downturn.

The Office for Budget Responsibility (OBR) said the economic outlook had “brightened” since its last official forecast in November, predicting a “shorter and shallower” downturn, and a faster fall in borrowing and debt.

However, the Government’s tax and spending watchdog also warned that households still faced the biggest twoyear squeeze in living standards on record. The tax burden remains at a postwar high and overall business investment is set to remain anaemic. Fallout from war in Ukraine and pandemic lockdown measures will also continue to weigh on the economy for years to come.

Growth

Britain is supposed to be in the middle of a year-long recession. Back in November, the OBR said the economy had started shrinking in the second half of 2022, and would not emerge from the downturn until the end of this year.

The independent body no longer believes this is the case.

While officials still expect the economy to shrink by 0.2pc this year, it thinks a technical recession – two straight quarters of economic decline – is no longer on the cards.

The projected decline is also much shallower than its previous forecast for a 1.4pc drop. Instead, the economy is expected to shrink by 0.4pc in the first three months of 2023, before flatlining in the second quarter.

The economy is then expected to grow 1.8pc in 2024 and 2.5pc in 2025 as the recovery gains traction, before slowing to 1.9pc in 2027.

Richard Hughes, the OBR’S chairman, said: “We now expect a shorter and shallower downturn in the first half of this year. This is a consequence of lower energy prices and interest rates reducing some of the near-term pressures on spending by households and businesses. The good news is that the economy is expected to shrink by just 0.5pc from peak to trough, much less than the 2pc fall forecast in November.

The bad? The economy will remain smaller than its pre-lockdown size until the middle of next year. Every other G7 economy is already larger.

The OBR’S latest forecasts remain significantly more optimistic than the Bank of England, which predicts the economy will shrink this year and next.

David Miles, an OBR official who used to set interest rates at the Bank, said the differences were due partly to an assumption that UK households will start raiding their savings as the squeeze on living standards continues.

Recent data suggest people are holding on to the extra money they saved on travel, lunches and going out during lockdown.

Even Jeremy Hunt is privately sceptical about this assumption. Mr Miles said that while it “sounds extraordinary, actually, it’s not extraordinary”.

Historically, it’s been common for the household savings rate to be that low.

Mr Miles also expects the Bank to upgrade its forecasts to take into account the boost from a bigger workforce and stronger economy.

Inflation

Rishi Sunak has pledged to halve inflation by the end of 2023. By this measure, the Prime Minister is more than on track. Inflation is now due to fall more sharply than the OBR forecast back in November. It expects that the rate will drop from its peak of 11.1pc in October to 2.9pc by the end of 2023. This is close to the Bank of England’s 2pc target.

Barret Kupelian, senior economist at accounting firm PWC , said: “The end result of lower inflation is less economic damage.”

But better headline figures will not bring much immediate relief for households. The lower inflation forecast is due to falling gas and electricity prices and the easing of supply bottlenecks, which will flow through to the price of goods. Here, the energy price guarantee becomes a double edged sword.

Capping the typical annual household energy bill at £2,500 until June 2023 (and then to £3,000 until March 2024), will see inflation fall more quickly. The OBR says it will knock 0.7 percentage points off the headline rate in 2023-24 when taken together with the fuel duty freeze and changes to alcohol duty. However, a fall today just means more stubborn inflation later, with the impact of subsequent increases to fuel and alcohol duties and the EPG measure then adding 0.4 percentage points to the CPI rate in 2024-25.

Also, while energy prices are expected to cool, food price inflation will remain high.

And the strain will be worse in the less well-off parts of the UK.

In 2024, the OBR expects inflation will fall sharply to 0.9pc before hovering around zero until the middle of 2026. It will not return to the Bank of England’s target rate of 2pc until 2028.

Living standards

While falling inflation offers some respite for households, it will not be enough to save families from the worst drop in living standards on record.

A toxic cocktail of inflation and high taxes means that real household disposable income will plunge by 5.7pc in the two years to April 2024. While this is not as bleak as the cumulative 7.1pc drop the OBR expected back in November, it represents the steepest drop over any two-year period since at least 1956.

As inflation eases, real incomes will start to rise again in 2024, but there will be no big bounce back. Next, house

‘Rules have been relaxed for building industry workers, but a similar move for hospitality has been rejected’

‘House prices are expected to fall 10pc over the next two years, ending pandemic property boom’

holds will have to grapple with the insidious effects of frozen income tax and national insurance thresholds.

The fiscal drag from these freezes will quietly push millions of taxpayers into higher tax bands – and mean millions more will start paying tax for the first time..

By 2028, real living standards will still be down 0.4pc compared with prepandemic levels. That means the average person will still have less money to spend than they did eight years earlier.

Migration

Net migration into Britain by foreign workers, students and families is set to average 245,000 a year and total 2.6 million under post-brexit reforms, according to official estimates.

The OBR has been forced to upgrade the figure from the 205,000 it estimated just five months ago. It represents a marked contrast to pledges by previous Tory leaders to bring net migration below 100,000 a year.

It has been fuelled by a more liberal approach to post-brexit immigration by Boris Johnson which saw his points system open up half of all jobs in the UK to foreign workers.

The numbers of foreign workers granted visas have nearly doubled from 170,500 to 331,000 in the past year, predominantly coming from non-eu countries since the end of freedom of movement required EU workers to get visas. They have been led by workers from India (110,000), Philippines (21,900) and Nigeria (17,500).

The new foreign graduate visa allowing students to stay in the UK for two years after completing their degree has seen overseas students’ numbers jump by more than two-thirds from 286,000 to a record 492,000 last year.

With humanitarian visas to Ukrainians topping 210,000 and 129,000 Hong Kongers taking up British National Overseas (BNO) visas, last year saw net migration hit a record high of 504,000, before the projected fall to 245,000 a year as students, workers and potentially Ukrainians leave the UK.

The OBR estimated that migration would account for an increase in employment growth of 160,000, bigger even than the 110,000 job growth projected from all the childcare and other employment measures laid out in Jeremy Hunt’s budget.

Madeleine Sumption, director of Oxford University’s Migration Observatory, said the post-brexit immigration system was largely admitting foreign high-skilled workers with one exception: care workers, of which about 50,000 entered the UK last year.

“It’s the kind of work being admitted not because the job requires a lot of formal training like most of the other jobs in the immigration system but because there’s a significant shortage,” she said.

With the construction industry also facing chronic shortages, the Government yesterday placed bricklayers, roofers, tilers, slaters, carpenters, joiners and plasterers on the shortage occupation list.

Government migration advisers justified the relaxation rules because of the “strategic importance” of the construction industry for the British economy. It rejected a similar move for hospitality in its interim report, published with the Budget.

Borrowing and debt

The OBR said the improvement in the UK’S economic prospects had “flowed through to a somewhat brighter outlook for the public finances’’.

Borrowing this year alone is expected to be £24.7billion lower relative to its November forecast thanks primarily to higher tax receipts and lower spending on energy bills support, despite the extension of the EPG.

The OBR said the outlook for borrowing had “improved materially since November”, with this year’s improvement expected to continue into future years because of the better starting point, with receipts “higher across all major taxes other than those related to energy” and fiscal drag delivering “stronger growth in key tax bases.

The Chancellor has chosen to use two-thirds of the borrowing improvement to pay for extending the fuel duty freeze, new business tax breaks and extending childcare subsidies.

However, it still means public borrowing falls to 1.7 per cent of GDP in 2027-28, meeting a fiscal target of keeping borrowing below 3 per cent of GDP by a wide margin.

The Chancellor also meets another goal to get Britain’s debt share falling by the end of the forecast, but only by a “vanishingly small” margin, according to Mr Hughes at the OBR. Debt falls from 94.8 per cent of GDP to 94.6 per cent of GDP in 2027-28. In cash terms today, this is just £6.5billion, by far the “smallest amount of headroom any Chancellor has set aside against his primary fiscal target, which has averaged £25.6billion in today’s terms since the OBR was established in 2010”, the fiscal watchdog said.

This headroom could easily be wiped out by a jump in gilt yields, which Mr Hughes said had been “very volatile” over the past three months.

House prices

House prices are expected to fall 10pc over the next two years as a jump in mortgage rates puts an end to the pandemic property boom.

Transactions are expected to drop by a fifth, reducing tax revenues from stamp duty by £5billion next year alone.

The drop is spread over two years due to 80 per cent of households being on fixed-term loans, up from fewer than 50 per cent before the financial crisis. This means the blow of recent interest rate rises will take years to flow through the housing market, according to the OBR.

By 2027, the average interest rate on outstanding home loans will hit 4.2 per cent – more than double the low of 2 per cent recorded in 2021.

The OBR downgraded its house price forecasts. Back in November, it had forecast that the average interest rate on outstanding mortgages would peak at 5 per cent. While it now expects average rates to settle, it added: “Low consumer confidence, a squeeze on real incomes, and the expectation of mortgage rate rises to come are expected to contribute to continued falls in house prices and a reduction in housing market activity.”