9 February 2023: UK may avoid recession

There is a growing possibility that the UK could avoid a technical recession this year, according to a survey published yesterday by the National Institute of Economic and Social Research.

However, the Institute still predicts that the country will see a prolonged and significant fall in living standards, while it also reduced its expectation for GDP this year to 0.2% from 0.7% previously. It also reduced its prediction for 2024 from 1.7% to 1%.

The Institute’s Managing director commented that its report paints a particularly downbeat picture of the UK, which will be slow to recover from the energy price shock that it saw in 2022.

One-in-four will be unable to afford heating and food without dipping into savings, or seeking government support.

One of the Prime Minister’s goals for 2023 is to see inflation halved and the Bank of England is acting cautiously, but judiciously in trying to drive inflation lower, although the natural fall in prices will see that goal take a little longer to achieve.

One issue that should be exercising the mind of Rishi Sunak is the wave of strikes that are affecting the public sector that appear to be as far from reaching a settlement as ever.

The last time the country was blighted by similar issues, the country, by and large, supported the stand made by the Government, but this is not the case currently and support for nurses and ambulance crews, in particular, is resonating with the overall workforce.

Inflation remains above 10% despite the Bank of England’s policy of interest rate rises, increasing the base rate of interest to 4%. It could easily need to add another 100 points in order to see inflation fall, but that will drive the economy close to a recession.

Sterling continues to flirt with the lower end of its recent range, although it appears to be building a solid base around the 1.20 level versus the dollar. Yesterday, It climbed a little, reaching 1.2109 and closed at 1.2068.

Andrew Bailey will face the Parliamentary Treasury Select Committee to answer questions about the Bank of England’s handling of the economy. This is a regular quarterly event, and it is doubtful that the Governor will reveal anything outside what is already well known by the market.

Questions are being asked about how much advance knowledge Jerome Powell and his colleagues on the FOMC had of the January employment report prior to its release. It is prohibited for anyone, including the Central Bank, to have prior warning of the data in order to avoid any concerns over market manipulation.

During his Q&A session at the Press Club of New York earlier this week, Powell dodged a straightforward question about whether the committee had been informed about the strength of the data, to which he replied that the committee based its judgement on the view from around the country from regional Fed Presidents.

That rather woolly response drove speculation that the FOMC based its latest interest rate decision on knowledge of the sizable increase in new jobs created. That having been said, surely if the FOMC was aware that more than 500k new jobs had been created in January they would have continued with another fifty point hike and not reduced the latest increment to twenty-five basis points.

It will soon be a year since the Central Bank began the current cycle of tightening monetary policy and the manner it has used in varying the size of rate hikes could see the economy achieve a soft landing which was seen as unlikely, at best, when they hiked by seventy-five basis points at four consecutive meetings.

The weekly jobless claims data released today will likely remain below the 200k level, which seems to be the pivotal point for the data. It is expected that new claims will reach 190k, bringing the four weekly average to 191.75k. A few months ago, the week’s figure was predicted to reach well in excess of 300k, and the current level stands as a testament to the continued strength of the jobs market.

The dollar continued to be supported despite the level of expectation that the Fed will fall behind in the coming months as the G7’s most hawkish Central Bank. For now, that accolade falls to the ECB.

The dollar index managed to eke out a marginal gain yesterday. It rose to a high of 103.52 and closed at 103.48.

It is becoming increasingly obvious that the two hundred and fifty basis points of rate increase that the ECB has provided since it brought to an end its extraordinary support for the Eurozone economy last year will be insufficient to have a significant effect on inflation.

Although headline inflation fell to 8.5% last month, core price increases remain above 5% and that is creating a problem for the ECB.

Christine Lagarde rightly called for support payments to help people deal with high energy bills to be dialled back last week, but her demands fell on deaf ears.

It is unusual for the ECB to involve itself in fiscal policy issues, but the payments are considered to be adding to inflation and run contrary to monetary policy increases.

While it is fairly common knowledge that the ECB expects to hike by a further fifty basis points at its next meeting, it is the next meetings, and the one after that, which are exercising the financial market now.

The more hawkish view is that one hundred and fifty more points of increases may be sufficient to see inflation be tamed, but a lot depends on changes to fiscal policy.

The Italian Central Bank Governor was unexpectedly sanguine over continued rate increases in his comments recently, but he may have been relying on continued fiscal support to quell any domestic unrest.

Since the inception of the Eurozone, Banks domiciled with the region have performed poorly. This has led some major financial institutions, Deutsche Bank is a prime example, to withdraw from several markets and become primarily a national rather than an international one.

Bank’s balance sheets have been the subject of severe scrutiny and the European Commission has bent over backwards in allowing them to write off bad debts over a period of eight years, which is not considered financially prudent.

The resilience of banks across the entire region has been tested again as the economy falters over the past year or so, But the prediction is that the improved capital bases of several major institutions will carry the forward with greater confidence.

The euro continues to drift against the dollar as ongoing Central Bank actions are leading to a debate over which of the ECB or Federal Reserve will have the highest rates when the music stops.

Currently, the single currency is exploring the depths of its recent range, falling to a low of 1.0709 yesterday and closing at 1.0713.

Have a great day!