University – March 2022
It’s a fortnight into the first war between major European nations for many decades, with Ukraine appearing ready to defend its independence from Russian invasion and both sides representing a willingness to dig in for the long term. Clearly there are a massive range of issues, with humanitarian ones being the most pressing. Readers will no doubt be following developments from a human perspective and without detracting from an issue which is of huge concern, we consider some of the potential issues from a business perspective for our clients.
The analysis of inflation and interest rates is often something of an abstract exercise, but the war will compound a range of pressures here in the UK. If nothing else the impact on energy and commodity markets will push up inflation, however as we all now know Ukraine is a big exporter of agricultural projects which means that it’s limited market access, combined with the practical reality that farmers are defending their country, results in Ukraine not making the most of planting season. Russia is, of course, also a major commodities producer and many of those markets will be disrupted by the sanctions put in place by most Western countries – including those such as Germany and Poland with a heavy reliance on energy imports from Russia.
This underlines the domestic impacts – the statistics on fuel poverty have been recently updated with 2020 data, published 24 February, and there was a House of Commons library report published a couple of days into March. Circa 13% of households in England are in fuel poverty, with a similar rate in Wales and higher in Scotland or Northern Ireland. This has wider implications not only on energy costs for Universities, which reduces spending power, but for those students from disadvantaged backgrounds whose mobility and learning may be negatively impacted. In terms of the immediate impact on Universities, interest rates have been relatively volatile with a number of days seeing 10+ basis points daily moves, and rates have broadly continued to rise. See the chart below which shows the interest rates looking at a 15-year SONIA swap and similar-tenor fixed-rate gilt – this means the cost of variable debt is likely to rise for both the University and for students. Ultimately, warfare is unpredictable and so too are its economic and financial consequences. All of today’s observations and commentary should be seen in that light…