In more grim news for the UK economy, data out of the ONS today showed that inflation in July reached 10.1%, once again exceeding forecasts.
A couple of weeks ago the Bank of England published some dire forecasts for the UK economy, but even those may now look underdone on the back of the latest inflation data.
What we are witnessing within the economy is more than just macro-moves. The ground is shifting quite rapidly, and as an industry, we will not be immune from the disruption to business that will cause.
Inflation at 15%
In the recent Bank of England forecasts, they predicted that at some point in Q1 of 2023 inflation would peak at 13.3%. These would be the highest figures in decades and would cause some serious damage to the ability of the general public to spend.
However, the BoE has been consistently behind the curve on inflation from the very start of 2021. Remember when they thought 4% would be the high? Now, banks such as Citi are predicting inflation soaring beyond 15%.
The inflation figures announced today beat estimates and were driven mainly by rising food and drink prices. So consider that in October of this year, then January and April of 2023 the energy price cap is set to rise to astronomical levels. It’s quite feasible for inflation to land in the 15-17% region.
What is beginning to worry me now, that I only want to cover briefly here, is that if the Bank of England decides to raise rates to 5-6%, it could result in many people being unable to afford their mortgages. The fallout of that particular problem we have seen before.
Real-world wages have also fallen the fastest on record. Although wages actually rose over 4% in July compared to the same period last year, inflation is so high that it’s rapidly eating away at spendable income. This is happening now before the painful energy price cap increases come down the line.
With millions of families already cutting back on spending, fenestration is going to be in the firing line.
Plan for recession
I imagine the MDs and CEOs within our sector are already plotting ways to navigate the oncoming problems. As I have mentioned previously, our sector is much transformed compared to 2019 and we are a bigger industry to sustain. There may be some tough decisions to make in the coming months if it means navigating 2023 with minimal damage.
There may also be some market consolidation as smaller companies are picked up by larger rivals seeking to make the most of their market positions. M&A activity could actually pick up over the next 18 months.
Some areas of our market will do better than others. I think the PVCu part of our world will encounter some significant disruption. Although cheaper than other material choices, profit margins at fabricator and sysco level are thin at best. Any drop in demand could be severe for fabricators that rely on volume.
The aluminium part of fenestration however could continue to see growth through this recession. There is a very clear move toward aluminium in the residential part of the market and attracts a wealthier bracket of clients that are going to be more insulated from the troubles ahead. If you’re a fabricator that still isn’t offering both aluminium and PVCu to installers, now really should be the time to rethink that position.
Strap in folks. The next 18 months could be rather grisly.
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