Ukraine and inflation share the spotlight in March

Ukraine & Inflation

Question-marks over global growth

Alongside the heavy human cost of Russia’s war in Ukraine, the Organisation for Economic Development (OECD) issued a warning about the economic impact. The crisis is set to drive up the rate of global inflation by around 2.5%, with high prices for oil, gas and wheat likely to persist. Many large US and European companies have halted business in Russia in protest of Russia’s invasion. Meanwhile, the International Monetary Fund (IMF) highlighted the impact of sanctions on the global economy and financial markets, and warned that the crisis is “creating an adverse shock to both inflation and activity” in many countries.

Fed tightens for first time since 2018 

The US experienced its first increase in interest rates since March 2018 as the Federal Reserve (Fed) raised its key rate by 25 basis points to a range of 0.25% to 0.50%. Policymakers also signalled the likelihood of further tightening during 2022, with the federal funds rate expected to reach almost 2% by the end of the year. The annualised rate of consumer price inflation in the US reached its highest level since July 1981 during February, rising from 7.5% to 7.9%. Uncertainties over the economic outlook were further compounded at the end of the month by an inversion in the US Treasury yield curve. The Dow Jones Industrial Average Index ended the month 2.3% higher.

Risks to the downside in Europe

President of the European Central Bank (ECB) Christine Lagarde warned that Russia’s invasion of Ukraine had increased the risks to the economic outlook, and warned that the crisis will have “a material impact on economic activity and inflation through higher energy prices and commodity prices, the disruption of international commerce and weaker confidence”. The eurozone’s rate of inflation surged from 5.1% in January to 5.9% in February, reflecting the continuing rise in energy prices. The Dax Index fell by 0.3% over March.

Covid resurgence in China 

Share prices fell heavily in China towards the end of March as a fresh wave of Covid-19 infections led to a lockdown in Shanghai. The Shanghai Composite Index dropped by 6.1% over March. Elsewhere, Japan’s economy expanded at a revised annualised rate of 4.6% in the final three months of 2021, compared with an earlier estimate of 5.4%. The Nikkei 225 Index rose by 4.9% in March.

Cost of living continues to surge

As well as the unfolding tragedy in Ukraine, the surging cost of living continued to garner headlines in the UK during March. The annualised rate of consumer price inflation rose to a fresh 30-year high of 6.2% in February, and inflationary pressures are set to intensify in April when the energy price cap is increased. The British Retail Consortium (BRC) warned that rising inflation “remains a significant concern for the economy, squeezing household incomes and increasing cost pressures on retailers”, and reported that shop price inflation had risen from 1.8% in February to 2.1% in March, representing its sharpest increase in more than ten years.

Spring Statement fails to deliver for many 

Inflationary pressures are set to “weigh heavily on living standards in the coming 12 months”, according to the Office for Budget Responsibility (OBR) , which expects real household disposable incomes per person to fall by 2.2% over the coming financial year. As a result, the Chancellor’s Spring Statement was criticised for failing to address the soaring cost of living. His measures included a 5p cut in fuel duty and an increase in the threshold at which people start to pay National Insurance Contributions (NICs) to £12,570. The basic rate of income tax was cut from 20p to 19p, although this cut will not take place until 2024.

BoE tightens again

UK interest rates were raised once again in March, bringing the Bank of England’s (BoE’s) key base rate to 0.75%. Looking ahead, inflation is expected to peak above 8% during 2022. The FTSE 100 Index fell heavily at the start of the month but went on to recoup its losses and ended March 0.8% higher. The FTSE 250 Index underwent a similar journey, rising by 0.4% over the month.

Mining sector drives special dividend payouts in 2021

Over 2021 as a whole, UK dividends rose by 44.3% on a headline basis and 21.2% on an underlying basis. Janus Henderson’s quarterly Global Dividend Index found that three-quarters of UK companies raised or maintained their dividend payouts. Headline dividend growth was stoked by record special dividend payouts from the mining sector. In contrast, dividends from the banking sector recovered only to half their pre-pandemic level. nevertheless, UK dividend growth during 2022 is expected to be driven by recovering payouts from the oil and banking sector.