On a recent episode of the Invezz podcast, I reflected with a market strategist on the dilemma we find ourselves in right now. I mean, is a recession coming?
The IMF got into the debate on Tuesday. He forecast that the UK would be the only “advanced economy” to go into recession in 2022. He forecast a 0.6% contraction, which is 0.9% below his previous estimate of 0.3% growth.
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That… not great. Even Russia comes out ahead, with an expected contraction of 0.3%.
I’ve covered the UK economy extensively over the last year, with all the twists and turns of a Netflix drama series and possibly even a follow-up book (no names). Perhaps none greater than the brief, but always as damaging, reign of Prime Minister Liz Truss.
It now looks increasingly unlikely that the post-Brexit UK will escape this mess without some form of recession, something the IMF agrees with. At least on the bright side, the IMF raised its forecast for growth of the British economy in 2024 from an expansion of 0.6% to 0.9%.
There was more positivity on a global scale, with the IMF upgrading its global outlook for the first time in a year, to 2.9%, an increase of 20bp from its previous report from last October.
Interest Rates And Inflation
Higher interest rates in response to crippling inflation have been the reason the global economy has slowed. Gone are the days of the relentless bull market, and now the Pied Piper is here to get paid.
The IMF forecasts that global inflation would fall to 6.6% in 2023 and 4.3% in 2024. However, this would still place it well above pandemic levels. Declining inflation numbers in recent months have been the main driver of a rise in markets, with the S&P 500 poised to post its best January since 2019, up 6% for the year.
For the UK specifically, the nation’s increased exposure to natural gas is causing problems in addition to the tighter monetary policy cocktail and high inflation seen globally. UK employment also remains below pre-pandemic levels, a concern as the labor market is extremely tight, ultimately leading to lower output and lower growth.
Whats Next?
Of course, these are just forecasts. Look no further than the eurozone posted amazing growth in the fourth quarter of 2022, beating analyst expectations for a contraction when it was announced today.
However, times are bleak in the euro bloc, and even more so in the UK.
All eyes will now turn to central banks in what is a pivotal week for markets. The UK announces its latest policy on Thursday, the same day as the eurozone and a day after the US, with the Federal Reserve announcing its plans this afternoon. With everything seemingly going wrong (inflation, employment, energy dependency, a weak pound, weak housing market and whatever else you can think of), the road ahead is rocky.
The next step, for now, is to see what the Bank of England announces on Thursday. Markets expect a 0.5 percentage point increase in the central bank’s base rate to 4%. This would be the 10th consecutive rate hike by the Bank’s monetary policy committee (MPC) since December 2021.
With the rate increase largely expected, it will be the language that comes out of committee that gets the most eyeballs. However, whatever is said, the road ahead looks difficult for the UK in 2023.
This article is originally published on invezz.com
