the times | Wednesday January 26 2022 V2 39

Business

Tensions between

Russia and Ukraine are

affecting energy prices

How can consumer spending rise in

the middle of a cost-of-living crisis?

T

he City of London has

become accustomed to

gloom. Believe them or not,

stark warnings of a post-

Brexit drain on talent,

economic power and relevance

hardly foster an ebullient

atmosphere — yet a fresh worry this

time last year was prompted not by

events in Brussels, but in New York.

The exponential boom of special

purpose acquisition companies, or

Spacs, had started to take in British

companies. There was no fear of

apocalypse, no dearth of certainty,

no political row over whether the

sky really is blue, but there was

anxiety about domestic businesses

drifting across the pond.

More than 600 Spac vehicles were

floated in the United States in 2021,

well over double the record set in

2020 and ten times 2019’s level. They

accounted for nearly two thirds of

all stateside initial public offerings

last year. No wonder the City

regulator loosened its rules to get

the Square Mile in on the action.

For those who missed the hype,

Spacs are shell companies that raise

money through initial public

offerings. Then, typically, they

search for a private company with

which to merge, providing their

target with a route to the stock

market. The company can go public

without the rigmarole of going

through the traditional listing

process itself; it also can pocket the

cash put up by the Spac’s initial

investors, who are offered a slice of

the combined group.

Taking this path has been

compared with strolling into a house

party through the back door. This is

too generous. It’s more like ringing

up someone already inside and

asking them to open a window. But

having unceremoniously clambered

through, the prospect of a soft

landing has proven elusive for many.

Promising British companies that

sought to capitalise on the frenzy

are now embroiled in its decline.

Three that arrived in New York in

the second half of last year —

Cazoo, an online used car retailer;

Wejo, an automotive data specialist;

and Vertical Aerospace, an electric

flying taxi manufacturer — all cited

robust demand from American

investors at the time; as of Monday,

shares in Cazoo had fallen by 53 per

cent, Wejo by 70 per cent and

Vertical by 30 per cent since their

respective Spac closures.

Retreating stocks might redden

faces, but the fad’s appeal is being

eroded by something else: should a

Spac’s early investors not like the

deal it strikes, they can redeem

shares and withdraw their money

before it’s across the line. Last

month Vertical said it had clinched

about $300 million as it completed

its merger with Broadstone

Acquisition, a Spac — shy of the

$394 million in expected gross

proceeds initially trailed and

inflated by $200 million in financing

from Mudrick Capital, a hedge fund.

What happened to the hundreds of

millions of dollars that Vertical had

anticipated from Broadstone’s

shareholders? They withdrew the

lion’s share, according to market

filings. Early investors redeemed

shares worth $289.6 million from a

$305.3 million trust.

Data collected by Spac Research

illustrates how this 95 per cent

redemption rate was among the

starker cases of an escalating trend.

Cazoo’s rate was 72 per cent and

Wejo’s was 58 per cent.

In November Michael Cervenka,

president of Vertical, acknowledged

a “hype cycle” around Spacs, but

said it had been coaxed by a

“mindset” among American

investors not yet prevalent in

Europe. “The best route for us was a

Spac in the US,” Richard Barlow,

founder of Wejo, remarked ahead of

its debut. New York “made sense”

for Cazoo, according to Alex

Chesterman, its founder.

Concern has faded among the

City’s custodians that a steady

stream of Britain’s best and brightest

will draw the same conclusions.

While more may be tempted,

soaring redemption rates and

tumbling shares have undermined

the allure. One less reason to worry.

David Smith

Callum Jones

Three things

dominate the

headlines: the

Russia-Ukraine

crisis, Downing

Street lockdown parties and the cost-

of-living squeeze. They are linked.

Russia-Ukraine tensions add to

upward pressure on international

energy prices. “Partygate” adds to the

impression of a dysfunctional, rule-

breaking government and a chaotic

prime minister, in which any action to

ease the cost-of-living squeeze has to

be seen though the prism of

leadership positioning.

The economics of the squeeze are,

however, interesting and rather

puzzling. One of the questions I get

asked most is whether the economy

can continue to grow even as high

inflation bites and pushes real wages

lower. It is a question with dimensions

for policymakers. If the squeeze was

going to hit the economy hard, would

the Bank of England press ahead with

its interest rate increases, with

another widely expected next week?

And how much can the Treasury

afford to mitigate the impact of high

energy prices and other aspects of

inflation?

The puzzle is easily stated. It is a

matter of simple arithmetic that it is

hard for the economy to grow much

unless consumer spending, which

accounts for more than 60 per cent of

gross domestic product, is also doing

so.

Forecasters do expect strong

growth in consumer spending. The

Office for Budget Responsibility, the

official forecaster, set the ball rolling

in October, predicting that household

spending would grow by a blistering

9.8 per cent this year. To put that in

context, in the pre-pandemic years of

2018 and 2019 spending grew by

2.1 and 1.2 per cent,

respectively. The Bank of

England was next to

join the party, saying

in November that

spending would

rise by 7.75 per

cent this year.

Things have

come down to

earth a bit since,

as economists

have incorporated

even higher inflation in their

forecasts. Even so, the latest average

of independent forecasts assembled

by the Treasury is for 5.9 per cent

growth in spending this year.

Consumers will be the bulwark of a

recovery in which the economy is

predicted to grow by 4.4 per cent.

Now here is the odd thing:

normally, you would expect strong

growth in consumer spending to be

driven by rapidly rising incomes, but,

because of the squeeze, nobody

expects that to happen. The OBR’s

prediction back in the autumn was for

a rise of only 0.3 per cent in real

household disposable incomes this

year. The Bank predicted that real

post-tax labour income would fall by

1.25 per cent. Independent forecasters

predict, on average, a 0.1 per cent fall

in real incomes.

Curious and curiouser. So where

does growth in consumer spending

come from? Part of it, one reason why

people should not think of celebrating

“strongest growth in the G7” or other

nonsense, is a statistical artefact.

Consumer spending was depressed

during the third lockdown of early

2021, falling by 3.7 per cent in the first

quarter. Even if spending was merely

to maintain its level of the third

quarter of last year (the latest figures),

it would record an 11 per cent rise

compared with a year earlier, starting

the year on an apparently very strong

note and bumping up the 2022

average.

The other reason that forecasters

are upbeat about spending is to do

with saving and borrowing. They

expect households to spend some of

their lockdown savings. The OBR

estimated these “excess” savings to be

£170 billion and said that it expected

5 per cent of them to be spent in each

of the next three years.

The other saving grace, pun

intended, is the

expectation that, as

things return to

normal, households

will put less aside

for the future,

with the saving

ratio, having

peaked at nearly

24 per cent during

2020, coming

down to 5 per cent

or so. People may

also borrow more.

Is all this a sound

basis to expect strong

growth in spending, given the

squeeze? Running down previous

savings and saving less depends on

confidence and, in particular, whether

people believe that the inflation

squeeze will be short-lived. They may

take some persuading of that.

What is the evidence so far? Retail

sales are only one part of consumer

spending, but they slumped by 3.7 per

cent last month, a fall that admittedly

had more to do with Omicron than

the cost-of-living squeeze.

The government could try to

guarantee strong consumer spending

by easing the squeeze. It could delay

the increase in national insurance due

in April, 1.25 percentage points for

both employees and employers,

announced last September. The public

finances are improving — latest

figures show that December’s

borrowing of £16.8 billion was

£7.6 billion lower than a year earlier

— but cumulative borrowing so far

this year was £146.8 billion, the second

biggest on record. Meanwhile,

government debt was more than

£2.3 trillion, or 96 per cent of gross

domestic product, and in his

comments on the figures Rishi Sunak

said that “risks to the public finances,

including from inflation, make it even

more important that we avoid

burdening future generations with

high debt repayments”.

Delaying the national insurance

increase is perfectly possible,

particularly by a prime minister in

trouble, but there are two problems

with it. One is that there would be no

guarantee that something deemed

necessary to pay for the NHS

backlog while fixing the public

finances would ever come back. The

other is that the government would

be hoist with its own petard. Having

opted for political reasons for an

national insurance increase rather

than a broader, income-based health

and social care levy, it would find

that most of the pensioners it chose to

protect would not benefit from any

national insurance delay. And the

basic state pension is due to rise by

only 3.1 per cent in April, at a time

when inflation could

be 7 per cent.

Easing the squeeze

is harder than it

looks.

‘‘

’’

David Smith is Economics Editor of

The Sunday Times

[email protected]

Callum Jones is US Business

Correspondent of The Times

City fears of an exodus

are fading as Spacs lose

their lustre in New York

Defiance: Next Gen Spac Derived ETF

Tracking performance of

US-listed Spacs

Source: Refinitiv

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