Market Loop - 🅱How will plan B impact the economy?

ECONOMY
How will plan B impact the economy?

What’s going on?
This week’s announcement of new Covid restrictions in England to curb the spread of the new variant has sparked concerns of an economic slowdown. This has led to calls for more government support for impacted industries and changed expectations of when interest rates will rise.

Why is this important?

The discovery of the Omicron variant of Covid-19 has kicked into gear the government’s “Plan B” which includes the return of work from home guidance and mandatory face coverings in indoor venues.

Sectors of the economy that will be most impacted - hospitality, travel and retail – were already experiencing a downturn in trade as consumers were uncertain of what would be announced. Pubs, hotels and restaurants have reported a wave of Christmas party cancellations. 

These sectors are now calling for government support like the reintroduction of the furlough scheme to protect employee wages. But it's thought the government will resist these calls unless more severe measures are brought in. 

Furlough was the single most expensive part of the government’s pandemic response, costing £70bn it ended in September. 

The Institute of Economic Affairs, a think tank, said the restrictions could wipe 2% off GDP, costing the UK economy £4bn a month.

The new measures have also led to a change in expectations of when the Bank of England will change interest rates to stem inflation which is at a decade high.

Before the emergence of Omicron markets thought there was over a 50% chance of a hike later this month. This has been reduced to just a 20% chance now. 

The reduced prospect of higher interest rates in the near future has taken the pound to its lowest level against the dollar in over a year at $1.32.

Takeaway
Bringing in new restrictions just weeks before Christmas was always going to be an unpopular move for the retail and hospitality industry. 

However, after almost two years of Covid businesses have adapted, finding ways to continue trading through periods of restrictions and lockdowns, for example by using online channels. This should in theory make the impact of plan B on the overall economy smaller than previous measures.

COMMODITIES
Coffee prices hit decade high

You can add coffee to the growing list of items that are getting more expensive. The world’s most popular bean - Arabica - reached its highest level in 10 years this week. At $2.50 a pound that’s almost double where it was in January.

And what’s behind this steep increase? It’s series of unfortunate events that have created the perfect storm.

First, colder than usual temperatures and drought in Brazil has damaged crops. As the country’s produces over a third of the world’s coffee, the poor weather has hit global output hard. Coffee crops in Ethiopia, another large producer, have been disrupted by the escalating civil war.

Next came issues with shipping. Exporters are having trouble securing freight to ship supplies, resulting in a 24% drop in exports for the world’s largest bean trafficker. The shortage of beans has led to a surge of “just in case buying,” further intensifying the supply crunch.

These problems look likely to continue for the foreseeable future. However coffee drinkers will be pleased to hear that it may not result in material change in the price of a cup of coffee. That’s because the cost of the beans makes up less than 5% of a cup of coffee. Most of what you pay for is the overheads of rent and staff wages.