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The Independent Automotive Aftermarket Federation

The perfect storm – Interest rates, inflation and global supply chain issues

Date: Friday 19 January 2024

Expectations that interest rates will be cut this year remain despite a surprise uptick in the UK's inflation rate last month.

Inflation, which measures how prices rise over time, rose marginally to 4% in December, up from 3.9% in November.

Economists had forecast a slight fall, but rises in tobacco and alcohol prices were behind the surprise rise.

But with energy bills predicted to come down in 2024, there are expectations of rate cuts later this year.

Spikes in the cost of gas and electricity and food costs, started by Covid lockdowns ending across the world and fuelled further by Russia's invasion of Ukraine, have put household finances under pressure in recent times.

The Bank of England raised rates in a bid to tackle the pace of price rises in the UK, which has strained the finances of households.

The Bank's rate currently stands at 5.25%, a 15-year high, which has led to higher mortgage rates due to the cost of borrowing money being more expensive. Returns on savings, however, have also gone up.

Financial markets and traders are still expecting it to cut its base rate in 2024 due to the inflation rate falling sharply since peaking at 11.1% in October 2022, which was the highest rate in 40 years.


Rate cuts ahead?

Inflation has also fallen quicker than the Bank had predicted, but it still remains nearly double its 2% target.

But on Wednesday, the markets shifted in their predictions on how much rates would be cut by.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, suggested that the five cuts priced in by investors before the latest inflation figures to bring rates down to 4% this year looked a "stretch".

But he added that energy prices falling further would drive down overall inflation, which he said should give the Bank "confidence" to cut its rate for the first time in May, "or failing that in June".

Source: BBC news


European industry would be the most heavily affected by trade disruptions

According to the IMF Port Watch data, daily transit calls through the Suez Canal dropped by 28% in the first week of January 2024 in comparison to the same period in 2023, due to security risks. This impacts a broad range of Asian, Middle Eastern and European countries that rely on this trade route, yet European countries are likely to feel the heaviest impact. The Suez Canal is an important trade hub for commodities, energy and various componentry shipping from Asia and the Middle East to Europe.

Electronics, chemicals, automotive, machinery and other engineering industries in Europe are the most vulnerable to trade disruptions as they rely heavily on imported components from Asia in their production network. Prolonged trade disruptions and shipment delays could force the companies to halt or downsize production. For example, Tesla already announced it will halt production in its Berlin plant for two weeks as a result of delayed shipments.

Production disruptions would also impact upstream industries in the production network and could cause temporary deficits of components or manufactured goods. In turn, this would add to the higher inflationary pressures across Europe. Companies are also likely to face greater pressure on their profit margins as slower economic and consumer income growth make it more difficult to fully pass on cost increases to the end consumer.

Source: Euromonitor International