UK Financial Stability – ‘it could be worse’
- Bank of England says economic outlook for the UK and globally has deteriorated.
- Share of households which are more likely to experience repayment difficulties not expected to increase substantially.
- Crypto meltdown not an overall risk to financial stability.
- UK banks have capacity to support lending to households and businesses.
- HL Savings and Resilience Barometer, produced with Oxford Economics, found that disposable income fell 3% in the past three months
- Further shocks could expose more vulnerabilities in the market-based finance system.
- Fresh Covid outbreaks, China property system and developing economies pose risks.
The Bank of England has identified risks to financial stability and agreed policy actions to safeguard the resilience of the system:
The second HL Savings and Resilience Barometer has been released, produced with Oxford Economics:
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:
‘’If the financial resilience of the UK could be summed up in a few words, ‘it could be worse’ would do the trick. That appears to be the overall verdict of the Bank of England’s report into the financial stability of the UK. Although the war in Ukraine has led to a deterioration in the global economic outlook and households and businesses could still be vulnerable to further shocks, the situation isn’t as quite as bad as previous crises.
Consumers might be coping with the biggest hikes in prices in four decades but compared to the months before the 2008 financial crisis hit, households aren’t as likely to dig themselves deeper into more debt. The escalating cost-of-living crisis is so stark that the government has already moved to pledge more support to those on lower incomes facing sky high energy bills. Separately the HL Savings and Resilience Barometer produced with Oxford Economics and published today showed that the effect of these payments will essentially be to offset the rises in energy prices we’re expecting in October.
The Barometer also found that soaring prices over the past three months mean two in five of us have been forced either to dip into savings, borrow money or cut our outgoings to make ends meet. Once inflation is taken into account, disposable income fell 3% in the past three months, which has had a knock-on impact on every area of our finances. The report also looks forward 12 months, to see how much worse things will be by then, and the news isn’t good. Income isn’t set to recover: even factoring in the government’s lump sum payments, it’ll remain broadly flat for the rest of the year.
Even though the economic outlook for the UK and globally has deteriorated, the Bank of England expects businesses on the whole to struggle on. It’s not going to be easy given that many are facing a cost-of-commerce crisis, grappling with supply chain challenges and a deterioration of consumer demand. It’ll be more challenging for smaller firms to repay borrowing and the expectation is that some businesses will fail, but overall it’s going to take a much larger shock to see a domino collapse of companies unable to pay their debts.
Winter may have descended on the Crypto Wild West with the value of coins and tokens hurtling downwards as speculators have taken fright, but the flight away from crypto isn’t judged to have shaken overall financial stability.
UK banks are considered to be sufficiently capitalised and strong enough to deal with the storms of a more sharp deterioration in economic outlook. Risks remain that they’ll move too quickly to batten down the hatches in the event of a deep recession, and be too conservative in lending, which could further damage economic resilience.
There are still clear and present dangers on the horizon. Emerging markets are highly sensitive to surges in commodity prices, fresh Covid waves are a continued risk and China’s fragile property market is still seen as a potential threat to stability. Although the Bank believes that right now the UK financial system will be able to keep calm, carry on and cope with the ongoing turbulence, another bolt from the blue still risks shattering confidence and resilience.
The volatility in financial markets is expected to continue and if central banks raise key interest rates faster than factored in, there could be fresh dramatic falls. There is enough liquidity for now to grease the wheels of the system, with trading not seizing up, but another sharp deterioration in asset prices could put pressure on vulnerabilities in the market-based financial system. What the bank wants to avoid is another dash for cash which swept through the financial markets at the onset of the pandemic. This saw investors selling their most liquid assets, so even those judged as safer like bonds were driven down dramatically leading central banks to step in with mass purchases.
The Bank of England is uneasy at the expectation that the buck will always stop at Threadneedle Street and that as an institution it will always be able to step in and try and save the day. It’s also highly concerned that the way commodity markets operate risk amplifying supply crises. Going forward it’s likely to require more market participants to make sure they have built up enough buffers to adequately insure against severe but conceivable shocks.’’
