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- [00:00]
Robert Peston
Markets are just getting this wrong.
- [00:02]
Steph McGovern
If it continues, then it will have huge consequences for the global economy and
- [00:07]
Robert Peston
for the uk Although we gotta hope that the view of markets that this could lead to some kind of stability relatively quickly is correct. There are enormous catastrophic risks around that. Hello, and welcome to the Rest Is Money, with me, Robert Peston.
- [00:24]
Steph McGovern
And with me, Steph McGovern. Now, the unrest in the Middle east continues to play havoc. We want to look today at the latest on what that means in terms of the global economy, what's happening with the stock markets, how are investors reacting to this, and in turn, how that impacts the forecasts we've had this week in terms of what is going on here in the uk. Robert, just kick us off on where things are at the minute, then.
- [00:47]
Robert Peston
So I was really struck by a data point that quite an influential investment manager sent me this morning, and it is that in the futures market, the price of oil for delivery in December is only up 3% this week, which basically says that investors believe that there will be a relatively stable end to this conflict in terms of shipments of oil. Oil and presumably potentially of gases as well, and that stability will come sooner than many people think. And so I thought that what we should at least start by doing is look at whether that kind of relative optimism is well founded or whether, which is often the case, markets are just getting this wrong, and getting it wrong in particular because there are some really big uncertainties out there. So just talk us through, Steph. What has been happening to oil and gas production facilities in the Middle East? What's been happening to that extraordinarily important shipping lane, the Straits of Hormuz, in the last, you know, since we did our last episode at the beginning of the week.
- [02:19]
Steph McGovern
So as things stand, there are still hardly any ships going through the state of Hormuz. The only ones really getting through are Chinese and Russian ones. And that's very much largely to do with the pressure that China's putting on Iran and the US around ground, keeping that movement of oil and gas through there. This tiny bit of waterway is where a lot of ships go through carrying liquefied natural gas, carrying oil. You know, it's, it's a fifth of the global oil supplies going through there. And this is a real chalk hold, because ships not being able to get through there is a real problem in terms of oil and, and gas getting out to where it is, is sold. And so at the moment that there's, there's basically no movement there, Trump's come out and said, well, on I'm going to help ships get through there. I'm going to send warships to support you so that they don't get attacked. He's also on about trying to be the insurer as well for these ships because that's another problem. We've had the big insurance firms say we're not going to ensure these ships trying to go through there because it's just too dangerous. There's just too much a threat of an attack. So you've got that problem there, that chokehold, and that essentially is temporary in a way because if they can sort that out and get those ships moving, that is a temporary problem. However, I think the bigger problem problem, and it's the one you made in the last podcast, Robert, is these attacks by Iran on really key producers of things like oil and gas and fertilizer. So if you look at what's happened so far, you've got, for example in Qatar, the biggest refinery, Ras Lafan, they're the biggest liquefied natural gas producing terminal. They've paused production of that. They've also paused production of what they call downstream production. Now that is things like fertilizer, which is obviously really important for food production. So at the minute they've paused production there. But then you've got facilities that have been hit in the uae, like oil installations that have been attacked by drones. And so I guess in terms of what this means for oil prices is how long is that production paused for? How much damage is being done by these drone attacks by Iran? Will that continue at the moment? As you say, oil hasn't gone up that much. Gas has. I think, you know, if you're looking at wholesale gas prices, they've shot up in the last couple of days. If you look at how much the UK is now paying for wholesale gas, it's the, it's the highest since 2022. So it's not as, as high yet as when it was the Ukraine war. But the, it's the rate of change that I think's quite scary there because we've seen like the biggest two day increase in UK wholesale prices we've ever seen. So it's more the rate of change. But Robert, as you said, this is the question around all of this is how long is it going to go on for? And if it's only a short blip then, I mean, blip feels like an understatement given what is actually happening out there. But if it's only a short stop in oil and gas being able to get through in this fertilizer being made and everything else, then we'll be able to recover from it. But if it continues, then it will have huge consequences for the global economy and for the UK as well. We're delighted to say that this year the Rest Is Money is being powered by Octopus Energy. So Greg is back with us. Greg, I've got another question for you. So in terms of energy companies, are we just back to the big six?
- [05:48]
Greg
You know what, we've only got like six or so major supermarket chains. No one worries about that because they invest ferociously in competition. You've got differentiation. You know, we thought the market was stable, then Aldi and little turned up. Competition is not about reinventing the souk with dozens of identikit companies. It's about companies having different approaches to looking after customers and competing ferociously on that. Energy could well be going that direction.
- [06:15]
Steph McGovern
Well, cheers Greg and thank you for powering this episode of the Rest is Money.
- [06:21]
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- [06:49]
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- [07:18]
Robert Peston
So look at the data points. There's no question that Israel and America have degraded Iran's missile ballistics drone firing capabilities to an extent. The number of missiles and ballistics and drones coming out of Iran has fallen. I mean, they're still posing a very serious threat to the region, the wider Middle East. But the volume has come down a bit. And that's another reason why investors are a bit more optimistic. But then there are counter arguments that one should make. I mean, for example, you talked about fertilizer out of Qatar. Iran is a very big exporter of fertilizer. None of that is leaving the country at the moment. And there is a risk if farmers food producers can't get fertilizer that the price of food is going to go up quite significantly. And we've seen in the very recent past rises in food prices massively reduce living standards, particularly for those on low incomes. And that has a direct impact on the more general growth picture. And of course, when you've got conditions, which we have at the moment of energy prices going up and potentially food prices going up again, we're in this situation where central banks become more pessimistic about the outlook for inflation. And even if we think in these conditions of an economic slowdown, that over the next year or two interest rates will still come down, they will come down slower. Right. And that is certainly in terms of the growth outlook, that is a negative because in the end central bank's primary responsibility is to curb inflation. So that will be painful. It's also painful for governments like the uk. One of the things we have seen is the price of UK government debt falling a bit. And the reason for that is, again, because when the price falls, that's the interest rate that the government pays going up. And that interest rate is linked to what central banks do. So if central banks are cutting interest rates slower, then sadly for the British government, that means its interest rates are falling more slowly. And at a time when they're shelling out £100 billion plus on interest, that is painful. For Rachel Reeves, I think the biggest worry and the reason why I'm not persuaded that investors optimism is well placed is it stems from two factors. I mean, I was talking to a very senior member of the government today and they repeated something we all know, which is that Donald Trump does not apparently have a plan, a roadmap for what happens after Iran is significantly weakened by this war. There is a genuine risk of long running chaos, which would be terrible for the people of Iran. And I think one of the things we should point out when we are focusing on markets and the global economy, we shouldn't underplay the absolute misery for the people of Iran, for people throughout the Middle east, since this is now a very wide conflagration. This is a Middle east conflict. This is not just Israel, America and Iran. The whole of the Middle east has now been drawn in in a way that is deeply worrying and causing all sorts of humanitarian problems. But the absence of a plan is obviously significant. I was quite struck that in the Financial Times, Martin Wolf paints a scenario which he thinks is the most likely scenario, although he's not forecasting it, that ultimately something happens here that is not completely different from what Trump did in Venezuela. Which is he, he's assassinated Khamenei, the Ayatollah, and ultimately some other dictatorial person takes over in Iran, with whom Trump does some kind of a deal that brings a bit of stability to the region. He gets a deal on no nuclear weapons development. He may even get a deal that somehow America get some of Iran's oil. And it's very much a sort of old style imperialist, colonialist solution. But the poor people of Iran are still subject to an appalling dictatorship. Freedom is not enhanced in Iran is just the worst kind of strongman geopolitical politics. And I have to say that is not, it seems to me, a completely unrealistic scenario, essentially, given what we know about Trump's instincts, which is, in the end, what he mostly cares about is what's good for America and what's good for him. And so all this talk initially of this leading to significant regime change and the flowering of some kind of democracy in, in Iran would be for the birds. So that would be a potential, I mean, depressing, but more stable outcome. And I suspect that is the one that markets and investors are focusing on. But I just want to make the counter case of what one's got to be anxious about, which is when you have a flailing regime, which we've got in Iran at the moment under so much pressure, we cannot rule out that Iran does something desperate and terrible. We don't think they've got the capacity to do anything terrible with their stockpiles of nuclear material. But is it possible that they could launch some kind of strike that leads to very widespread deaths of civilians? I think that's possible. And then all hell breaks loose. So I do think that although we gotta hope that the view of markets that this could lead to some kind of stability relatively quickly is correct, there are enormous catastrophic risks around that.
- [14:26]
Steph McGovern
Yeah. I mean, and as you say, in that period, it's the chaos it causes, it's the instability. But I do wonder, given we've talked about this before, about the, the, you know, the tackle Trump, Trump chickens out. Trump does care about, especially with the midterms coming up, is, is the promises he's made to American people, like the point on oil reserves. And, you know, when he came in for the second term, he talked about wanting to make sure that he, the oil reserves were, I think he called it, right to the top. And yes, they have got big oil reserves in the US as has China, but they're going to deplete, aren't they? The longer this for, it's going to really impact that. And that will put up oil prices for Americans. And that is one of the things, you know, you'll know this, Robert, whenever I was ever sent out to cover the budget for the BBC and, and the years since then, one of the really tangible things for people is how much they are paying for fuel. You know, we talk a lot about energy costs, but it's also filling up a tank. It's, you know, using, if you're using heating oil or whatever. Those types of things really matter to people. It's really tangible. And so there is potentially what might stop Trump carrying on this conflict is what happens to oil prices, to oil reserves, to energy prices. That could be the thing that could be what pulls him back from the brink on this. I mean, what do you think, Robert?
- [15:56]
Robert Peston
So, historically, in the last, well, you know, actually in both his terms as president, what he often looks at is the stock market. It is interesting to me that although we've seen, I mean, yesterday in particular in the UK Stock market, we saw a fairly sharp fall. Actually, the US Market has been much steadier than I thought it might be. But in the Far east, overnight, as you know, today, as we record, we saw sharp falls in Korea, we saw sharp falls in Japan. These are economies much more dependent than America is on flows of oil and gas from the Middle East. I think it's important to note that America is largely, because of the massive fracking revolution that there has been. It's largely independent when it comes to its oil and gas needs. It's got significant reserves and significant production. You could see a world or a scenario with Trump that if the world price of oil and gas rises and that would have forced up the price in America, that he would either regulate that price down in America because he has the, you know, he is somebody who is incredibly focused on how, you know, voters feel in respect of the more explicit prices that they're paying. So you could see a situation in which to go back to your original point, he intervened very directly in American oil and gas markets to make sure the price doesn't rise too much. If there were, we haven't seen it yet, a very big stock market negative reaction. And I still think that is a real possibility. I think at that point, the chances of him chickening out are much greater. The problem is that even if he were to try and expedite some kind of solution faster, he has opened a can of worms, a Pandora's box. This is a terrible mess that he's already created. And it is quite hard to make rational, confident forecasts about essentially where we will end up. The only thing that we can be confident of is that the world is a much more unstable place, it's a much more dangerous place. And that brings all sorts of consequences for the British economy and also for where and how the British government allocates its resources, in particular, how it gets its defense spending up. And maybe after the break, that is what we should unpick. Close your eyes, exhale, Feel your body
- [18:42]
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- [18:55]
Robert Peston
And breathe.
- [18:56]
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- [19:07]
Steph McGovern
1-800-contacts.
- [19:10]
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- [20:06]
Steph McGovern
Welcome back to the Rest Is Money
- [20:07]
Robert Peston
with me, Steph McGovern and with me, Robert Pastor. Now, in a minute, we will unpick what in the Chancellor's spring statement remains relevant in these turbulent times. But you had a couple of thoughts. You also wanted to add on what households and businesses in the UK will be paying for gas in the coming months.
- [20:28]
Steph McGovern
Yes, because obviously, as we've just been talking about, the wholesale price of gas is, well, it's shot up. So how much the UK pays for this gas. And gas is a prime driver of UK electricity prices as well. So this is a big deal for us does in terms of our energy usage. Now, you know, you'll remember this, in the last week or so, we had the latest energy price cap announcement. So some of you might be going, well, hang on a minute. Won't that stop the unit price that we pay for energy from going up. And they, yes, for now it's not going to change anything. But at the point is this price cap gets reviewed every three months. So if this continues, if we continue to see the wholesale price of gas going up, then that is inevitably going to mean that that going to be lifted. And that's one of the big things that the, you know, the labor government have built their, you know, built their manifesto on was bringing down the cost of living. And, and energy prices is absolutely key to that. And you know, we had the spring statement this week, which I know you're going to talk about, Robert, but that forecast of what's going to happen in terms of inflation and in terms of growth was based on the assumption that the gas price would stay pretty stable. And if it's temporary, what's going on in the Middle east, then hopefully that will be the case, that it'll be more stable. But if it isn't, then that's going to potentially throw all these forecasts out the window. Robert, what's your take on it?
- [21:58]
Robert Peston
So I didn't think that the spring statement was irrelevant. There were some genuinely quite useful forecasts in there. One of those that was most important for me was that the obr, the Office of Budget Responsibility is more pessimistic about the outlook for growth this year than it was only a few months ago. It's expecting, you know, expecting lower growth, only 1.1% this year, which is definitely not the UK off to the races. If you think about the kind of growth we had before the financial crisis of nearer 3% and actually the fact that Keir Starmer and his colleagues are desperate to get growth back up above 2%. Well we're a country mile from that now. It is expecting slightly higher growth in subsequent years but, but one has to have even less confidence than normal in those subsequent year forecasts because of the uncertainties. Now what we know is that growth is unsatisfactory now, now in living standards actually because of direct action that the government is taking. Right. So abolishing the two child limit on universal credit, upping the rate at which that universal credit is paid. If you are on lower incomes, if you are in receipt of universal credit, you will be significantly better off this year. That's got nothing to do the growth rate. That has just got to do with the fact that benefits are going up. But then there are all sorts of uncertainties about whether that rise in living standards will reverse in subsequent years. And I guess the most important statistic, given the shock that we are experiencing, is that the so called fiscal resilience of the UK has improved a bit. We've got this enormous debt burden, 100% of GDP, 3 trillion trillion pounds worth of debt, 100 billion of interest rate being shelled out every year. Worries of investors that our debt burden is not sustainable for the long term. But we have a Chancellor that has said, and to an extent in public is committed to trying to manage the debt so that at least it doesn't increase in a terribly significant way. And the OBR did say that in terms of one important measure of resilience, which is the headroom, the extent to which the Chancellor is meeting her own fiscal targets in five years time to make sure that the debt burden is not increasing excessively, that that headroom has increased a tiny amount, right? It was a bit over 20 billion pounds at the last budget, which was double the headroom as a result of her higher taxes that she'd had in the previous budget. It rises on the current forecast by another, well, just less than £2 billion. Now, truthfully, £2 billion against the, you know, against the backdrop of £3 trillion of debt is a rounding error. It's trivial. But at least the finances on the basis of this forecast are not getting worse at a time when we are experiencing this global shock. So I didn't emerge from the Autumn Statement thinking, wow, we're safe. But at least I emerged thinking, okay, some of what she did in raising taxes at the last budget possibly puts us in a slightly stronger position to weather this storm.
- [25:42]
Steph McGovern
But for me, I think it's unemployment that's worrying me because, yes, if your, you know, tax receipts are higher partly because you've been charging businesses more to employ people. And I do worry, you know, I know the, the forecast says it's going to peak, unemployment's going to peak at 5.3% later this year. But my big concern is youth unemployment. You know, we've got another rise in minimum wage coming up again soon. It's going up by eight and a half percent in April. That's big cost for business. Our businesses going to start looking at who they're employing and thinking, well, hang on, they used to be, they used to be cheaper to employ young people. Let's not bother, let's just work with what we've got. And so I do worry about, yeah, okay, you might have increased your buffer, your headroom, you might have brought down public sector net borrowing, but at what cost and how much pressure is that going to put on the welfare system if you've got more young people, particularly who are unemployed and relying on benefits.
- [26:45]
Robert Peston
I mean, it's such a strong point, such an important point. And, you know, opinion polls at the moment show that what worries British people more than anything else is the rise in unemployment. There is, in my view, quite a good chance that the Office for Budget Responsibility is being a bit naive and a bit overoptimistic in assuming that unemployment will peak this year. You know, we are experiencing, as you say, particularly acute for young people, but we are experiencing very troubling trends in the labor market, and particularly if the confidence of businesses is undermined by what's going on in the Middle East. And particularly, this is something actually, funny enough, we're going to be talking about in our next episode when we interview Mark Warner of Faculty AI. But at a time when there are all sorts of rational forecasts that says that the AI industrial Revolution is going to eliminate very large numbers of jobs, one has to be very anxious about the outlook for unemployment in the uk. And I think you also wanted to highlight another risk, which is what it means, this breakdown of relations between Donald Trump and Keir Starmer. The fact that this very cozy, friendly relationship has now turned really quite nasty.
- [28:15]
Steph McGovern
Yes. The fact that Trump. Trump has come out saying that he's no Winston Churchill. You know, this is all about not letting the US use the UK bases straight away. We have now. But that delay has obviously pissed off Trump. And Interestingly, you know, it's 80 years since Winston Churchill used that phrase, the special relationship. How important do you think, Robert, that is? I mean, there's a sense that Trump might just get over it because there's just too much going on and he'll just kind of, of, you know, eventually we did let them use the bases, so maybe he'll just forget about it in the longer term. But he's been, like, pretty hard on Spain, saying on the basis they won't let him use their bases there, they're not going to do any trade whatsoever with Spain. And he is so irrational that he might, if, if the UK do anything to, you know, if Starmer does anything else, he might go stuff you. No more trade. And there is that danger there, isn't there? And so Raise Reid has also been delivering that statement in the context of a bit of a fractious relationship with America again.
- [29:22]
Robert Peston
Yeah, look, and the thing that worries me most, given the breakdown of relations between Trump and Keir Starmer, is, you know, we talked at length about how the cozying up by Starmer to Trump, which, you know, quite a lot of people on the left and right in this country didn't like because so many British people don't like the sort of semi autocratic way in which Trump has been managing America and has been intervening in countries all over the world. And there are quite a lot of people who thought that Starmer could have been tougher with Trump. Nonetheless, the prize was to get better tariff terms, better trade terms than many of our competitor countries. And that seemed to work. You'll recall that when it came to steel and auto and car manufacturers, we did get preferential terms. Now, the thing that worries me, particularly in the wake of the Supreme Court's ripping up of the central plank of Trump's powers to raise tariffs, that Trump could basically decide to take his revenge on Starmer, who he's decided has let him down by not letting him initially use British air bases for the attacks on Iran. Trump is a vindictive president and there is a genuine risk that he will impose higher tariffs on important exporters in the uk and frankly, if I were an exporting business with big trade in the US Car manufacturer, steel manufacturer, any kind of supplier of goods to America, I would be very anxious because particularly in the light of, as you say, the extraordinary rhetoric which you pointed to that he used against Spain, that he will simply say, you know, perhaps even in a best case, that the UK will now get the terms that the rest of the world gets. And so all that sucking up to Trump will have been for nothing.
- [31:39]
Steph McGovern
Yeah, although it's improving his popularity potentially, isn't it? Maybe.
- [31:43]
Robert Peston
Well, it won't. I don't think it will improve his popularity, you know, if in the end the collapse of any kind of trade deal with the US damages people's living standards.
- [31:55]
Steph McGovern
Yeah, yeah. Okay. We should probably wrap things up. And as you mentioned in our next podcast, we're going to be interviewing Mark Warner, who is really fascinating. Set up a London based AI firm, Done really amazing stuff with the company, actually. And so, Robert, that's going to be our next podcast, isn't it?
- [32:15]
Robert Peston
It is so much to chew over with Mark.
- [32:17]
Steph McGovern
That's it from us for now. Bye bye.
- [32:19]
Robert Peston
Goodbye. Foreign.
- [32:25]
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