Business Magazine 24

Charts show world of pain for UK in 2023

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.

There are a few noteworthy elements in this. First, the UK was crucial in helping to supply gas to all of Europe so that its storage could be filled. The other effect, though, was to widen the price disparity between European and UK gas.​
Wholesale day ahead gas prices

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.

​The likelihood is that these numbers will continue to rise this year and not reach their peak until 2024, making this year another challenging year for the NHS. The issue is that it is dealing with a significant COVID overhang in addition to the growing weight of an ageing and less healthy population and the rising expense of drugs. Oh, and this is all before taking into account the effects of the wintertime strikes. In other words, if you believed that the NHS will stop making news in 2023, reconsider.

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.​

You can see from the bars how much UK government debt will be issued in the upcoming months. Any money sold to private investors above the line is considered to be surplus. Anything below the line represents bonds purchased from individual investors.

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.


Interest rates

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. 

Naturally, as the year went on, that started to alter as a result of both rising prices and the UK’s change in government. The predicted peak increased from about 4.5% to as high as 6.4% after the mini-budget, which was still pretty spectacular. The Truss administration was short-lived and rate expectations subsequently decreased. However, the money markets continue to predict that interest rates will reach 4.5% by the middle of 2023 (base rate is currently at 3.5%). The next question is whether this proves to be accurate or if the Bank retreats as it has frequently signalled it will.

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.

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