Given the drama of 2022, we can never predict what 2023 will bring.
However, that need not prevent us from trying, so here are a few charts that may help paint a picture of what could be a ‘world of pain’ for UK consumers in 2023.
The divergence of gas
One of the most puzzling aspects of 2022 was that the UK was flooded with natural gas yet experiencing a significant increase in gas prices. This was mostly due to the industrial geography of the gas market, where pricing and flows are largely determined by factors other than supply and demand, such as the location of the pipes and the gas source.
Typically, the UK sends gas across the channel’s pipes into the continent in the summer and pulls it back in the winter. At that point, Europe was in desperate need of additional gas and one of the only ways to get it was via large liquefied natural gas carriers, the majority of which had to dock in the UK before sending their cargo through British pipelines over to Europe to be stored. This is why it was drowning in gas even as we faced a so-called “shortage” in 2022.
The result is displayed in the accompanying chart. Costs in the UK and Europe both increased, but the European prices (red line) increased significantly higher. Whether this turns backward in 2023 is an intriguing subject. Does the UK now pay more for gas than Europe because it depends on it throughout the winter? If there is a scarcity of gas (or if Russia cuts off its supply), is Europe willing to send that gas over? Does this tendency, in which the UK has cheaper gas costs, continue in the summer?
The speed at which Europe can construct new terminals to take in more gas will greatly influence this, but the key implication of all this is obvious. The prices we all pay for our gas bills are influenced by these wholesale pricing. Before last year, the odd transgressions of the gas market didn’t really matter. They all of a sudden become significant.
Lengthening NHS waiting lists
The growing number of people on NHS waiting lists, which totaled more than 7 million by the second half of the year, was one of 2022’s defining characteristics. How quickly the NHS can eliminate these backlogs is the key question.
A tidal wave of bonds
Although this chart is rather complicated, if you understand it, it is truly amazing. The background here is that, as a result of the mini-budget, the government bond market, which was previously one of the most dull areas of the financial system, became quite exciting in 2022, and it might continue to be fascinating (in a bad sense) in 2023.
The main takeaway from this is that the private sector is being asked to absorb an unprecedented amount of government debt.
A few things are beginning to emerge, as you can see. First, pay attention to the dark blue lines. All those bonds that the UK government auctions off represent debt that is being issued by the government (remember they still borrow a lot more than they raise in taxes). Bond issuance has had a few significant peaks, including those that coincided with the financial crisis and recession of 2008 and COVID in 2020. It’s the polar opposite of suggesting that those years had significant deficits.
However, there is also something else going on. Take a look at the pale blue bars. The Bank of England is purchasing and selling these bonds. And you can see how, in the past, it was purchasing a LOT of government bonds through its quantitative easing (QE) programme. The government’s 2020 debt escalation was almost totally “cancelled out” by the Bank of England’s concurrent purchase of hundreds of billions of pounds’ worth of bonds from investors through its QE programme.
Now fast forward to 2023, and the light blue bars are now over the line because the Bank of England is no longer purchasing those bonds from investors but rather reversing quantitative easing and selling them. The end result is that a record amount of government debt is being expected to be absorbed by the private sector. The important line in this case is the red one, which subtracts the blue bars. In the upcoming years, it will be higher than ever before. We are going to find out how quickly the market will absorb that debt. It could well be a rough ride.
While it’s difficult to predict exactly where they’ll go (just like it’s difficult to predict what Vladimir Putin has planned next), the market has made some educated forecasts. But what’s remarkable is how much those hypotheses have changed over time. Consider this. Just a few months ago money market traders were still anticipating that rates would only increase by 1.5% or so over the next few years.
The other concern is whether rates start to drop quickly after that. However, the result for many households is that the cost of borrowing, something they haven’t had to worry about much over the past ten years or so, will be significantly higher. The mortgage woes that dominated conversations in the 1990s will reappear. On the one hand, a sizable proportion of older households are fortunate enough to have their mortgages paid off at this time. The cost of real estate, on the other hand, is only rising for people who are renting or who have mortgages. This is going to be one of the stories of 2023, much as the cost of living dominated in 2022.