High prices and low growth should nip interest rate hikes in the UK and Eurozone in the bud | Interest rates
A recession is just around the corner. That’s what many economists and financial analysts in the UK and across Europe fear as inflationary pressures clash with Russia’s invasion of Ukraine to undermine the post-Covid recovery.
On Monday, the Office for National Statistics will report how much the UK economy has grown in February. Any chance of matching January’s GDP growth seems optimistic.
Sanjay Raja, senior economist at Deutsche Bank, believes that after the 8% increase in January – well above most analysts’ expectations – growth will fall to just 0.1% in February, buoyed by a dip in the industrial sector. production. “The bad news is we don’t expect the recent strength of activity to last very long,” he said, adding that a March decline was also likely, pushing first-quarter GDP growth perhaps not even 1%. will reach .
A contraction in the second quarter is almost certain, given “a bigger jump in energy and food bills, higher taxes, a turnaround in Covid health spending, some destocking in the manufacturing sector and the extra holiday in June”.
Suren Thiru, chief of economics at the British Chambers of Commerce, said the combined growth in January and February looks like a peak: “When we look at February’s numbers, it feels like we’re looking in the rear-view mirror.”
Thiru agrees with Raja that things are going downhill for the UK from March. GDP in the second quarter, from April to June, is likely to contract. Economic convention says that if there is a second quarter of negative growth from July to September, the UK will officially be in recession.
At the moment few forecasters suggest the UK is on the cusp of experiencing two consecutive quarters of negative growth, but most say the risk to their forecasts is over-optimism. Uncertainty in particular is a growth killer and there is currently plenty of economic uncertainty.
A long war in Ukraine, heightened sanctions against Russia and oil prices that remain above $100 a barrel are likely to push inflation to even higher levels and undermine the feeling among businesses and consumers that it is safe to make investment decisions.
A gas price that remained more than five times pre-pandemic levels and fueled a cost of living crisis would only make matters worse, Thiru said.
Consumer confidence has fallen in recent months and is now at the low level before the second lockdown in 2020. Business confidence has also crumbled, according to the Lloyds Bank business barometer. Lloyds said the confidence drop in March was the biggest since the first two months of the pandemic.
The situation could worsen if central banks misinterpret signals from the economy and continue to plan to raise interest rates, said Dario Perkins, an economist at consulting firm TS Lombard. He argues that the Bank of England — and possibly the European Central Bank — are on the brink of making a historic mistake that could plunge their respective economies into recession.
Both the Bank and the ECB have been talking loudly about tackling inflation with higher borrowing costs. Financial markets predict that the Bank of England could push its key rate to 2% next year, from the current 0.75%.
“A rapid monetary tightening outside the US is likely to end in a Trichet-esque fiasco,” Perkins said.
He refers to the aftermath of the 2008 financial crash when ECB chief Jean-Claude Trichet, seeing commodity prices, especially oil, skyrocket, was convinced that he needed to raise interest rates.
The highly indebted eurozone economy was unable to cope and by 2012, the continent was plunged into a crisis that nearly brought the euro project to an end.
Albert Edwards, the global strategist at Société Générale, said the threat of higher interest rates in the US alone had made borrowing more expensive and limited the number of rate hikes needed. That should prevent the Federal Reserve from pushing its key rate above 1%.
The UK may see interest rates rise slightly above this level, while the eurozone, where interest rates are currently negative, could expect its first positive interest rate since 2012. But worries about higher rates leading to a recession will almost certainly be on the minds of most rate-setters.