A simple illustration of why the UK is headed for an inflationary profits recession - the impact on the nation’s gross operating surplus

In my multi-decade career actively managing and analysing the capabilities of bonds, I would receive many reports prepared by economists at independent economic specialists/think tanks, sovereign Treasury departments, supranational institutions (World Bank, IMF), central banks, major commercial and investment banks and brokers.

These reports contained analyses of components of the economy and their impacts on variables such as GDP growth, inflation and unemployment and the all-important forecasts for short term policy rates of central banks and their likely impact on bond yields and spreads across the curve to the “long end”.

These reports were received monthly (electronically) from organizations like Consensus Economics and in face-to-face meetings on a quarterly basis where the key points were discussed with economists and the “dealers” from the bond desk - usually over 2–3-hour meetings.

Armed with this economic input and the minute to minute dynamic pricing of short and long term government and corporate bond yields,

I was able to provide consistent risk adjusted “alpha” for the portfolios I personally managed (billions of bucks worth) and to make sur that the world’s leading fixed income managers did the same - working with an excellent team and finishing my career ten years ago as the US Head of Global Fixed income at a leading global investment consultancy.

I mention this so you have some context for the following. I am not a trained economist though my Mba, competed in 1990 provided “basic training” which was supplemented by the constant influx of economic reports and face to face meetings with specialists.

Ok, let’s dive in.

The measurement of GDP can be made using three approaches - changes in Production, Expenditure and Income. Most usually it is expressed as changes in the components of Consumption, Government Deficits, Income and (Exports less Imports) - reflecting borrowing changes only in the amounts of interest washed through Consumption and Government deficits.

Let’s look at just one piece “gross operating surplus”.

From Brave AI:

“UK GDP Profit Component

The profit component of UK GDP is a part of the income approach to measuring GDP, known as gross operating surplus (GOS).

GOS includes gross trading profits, plus income from rental of buildings, less inventory-holding gains (changes in inventory value caused by price).

This measure is a component of the income approach to GDP, which also includes compensation of employees, gross mixed income (GMI), and taxes less subsidies on production and imports.

The GOS is subject to balancing adjustments before publication to ensure consistency with other GDP components.”

Here is that measure over the last five years for the UK, again from Brave AI:

“The gross operating surplus of the United Kingdom for the last five calendar years is as follows:

• 2023/24: £49.5 billion

• 2022/23: £47.8 billion

• 2021/22: £46.4 billion

• 2020/21: £44.5 billion

• 2019/20: £42.9 billion”

Nominal UK GDP for 2023 was around £3.3 trillion pounds, so the rate of the GOS to GDP was a paltry 1.5% - not good.

Now let’s check out some of the pressures that the GOS is under.

First, we have the 14% increase in the energy cap, inflicted by the regulator, OFGEM. Remember the price increase is not based on relative prices of the possible sources of energy, it is based on the politically influenced current energy mix. Otherwise, energy prices would be at least 75% lower.

There is no easily available data for UK company spending, but we have this for households: (from Brave AI)

“The United Kingdom spends a significant amount on energy annually, with expenditures varying between electricity and gas. According to recent data, in 2023, UK households spent £30.755 billion on electricity alone. For gas, the expenditure was approximately £24.9 billion in the same year.”

Around 55.6 billion pounds that has bee hiked by 14% in two stages in August 2024 (10% and January 2025 (4%). The impact on the GSO is 7.8 billion pounds.

Next, we have the cost of providing for immigrant beggars. At current rats, another half a million will arrive over a year. I estimate each one costs around £25,000 pounds each for food, accommodation, health, education, security, translation and transport.

Another 12.5 billion a year (on top of the cost of around £200 billion pounds a year for the existing guesstimate just 2 million immigrant beggars accumulated over the last two decades - (remember that out of the last 3 million immigrants, 22% are actually working - Nigel Farage numbers.

Starting in April 2025, the estimates of the increase in employer National Insurance rates for employers are around £25 billion pounds. Other tax hikes are for a further £15 billion pounds. Inheritance tax changes are set for 2027.

Increases in the National Minimum Wage according to Brave AI:

“As of January 30, 2025, the National Minimum Wage rates in the UK are as follows:

• Age 21 and over: £11.44 per hour, also known as the National Living Wage.

• Age 18 to 20: £8.60 per hour.

• Under 18: £6.40 per hour.

• Apprentice: £6.40 per hour for apprentices under 19, or those aged 19 or over in the first year of their apprenticeship. After the first year, apprentices aged 19 or over are entitled to the minimum wage for their age group.

These rates will change on April 1, 2025, with the National Living Wage increasing to £12.21 per hour for those aged 21 and over, and the rate for workers aged 18 to 20 increasing to £10.00 per hour.”

“As of April 2023, the Low Pay Commission estimates that there were around 1.6 million workers paid at or below the minimum wage in the UK, which is approximately 5% of all UK workers. “

These are increases of between 6.7% and 16.3% for 1.6 million people. Let’s call it 12$ with a rat increasing from £10 pounds to £11 pounds for a 40-hour week. 48-week year. That’s an increase from around £30.7 billion to £33.8 billion = £3.1 billion pounds.

These are all headwinds that need to be overcome in order to improve on the 2023/24 gross operating surplus of 49.5 billion pounds.

7.8 billion from the insane “net zero” energy price hikes (including corporate energy cost increases)

12.5 billion from half a million more immigrants beggars

40 billion from high employer national insurance and other employment tax hikes

3 billion pounds from increases in the National Minimum Wage.

So much for the gross operating surplus - something has to go up - a lot.

Domestic and international investors will be looking at the impacts in other ways, but the gross operating surplus illustrates the direction of their conclusions and will, at the least prefer short-dated government bonds - UK gilts - to domestically oriented equities.

And all this before the plans to build 300,000 new “green” houses a year (and increase from the current annual rate of around 200,000 new homes)

And don’t forget this upcoming indirect tax on employers.

What’s in store for employment law in 2025 | Make UK

“The Employment Rights Bill incorporates significant and wide-ranging employment law reforms, including changes on matters such as unfair dismissal, changing terms, unpredictable hours contracts, flexible working, equality at work and harassment, trade union rights, family leave, sick pay and redundancy.”

Socialism all the way down - a true kakistocracy that is throttling the country.

Onwards!