let me confront those – not least the people, the Governor of the Bank of England – who wrote about the near certainty that Great Britain falls into stagflation.
Indeed, those are the numbers of those predicting that UK GDP will collapse and bury itself economy with them you can imagine they got together to pay for a beggar’s tombstone with an inscription in simple words RIP UK economy. Indeed, I will try to calm such fears Recessioninterest rates and prices citing various reasons why Britain would actually break up.
Recessions don’t just happen. In general terms, a recession is caused when one of three key markets fails – namely jobs, property or banks. And make no doubt that all three of these critical elements of the UK economy are fundamentally sound. With more than 1.3 million vacancies on the labor market, you can be envious. The UK hiring backlog will gradually ease, not least because those who left the UK when COVID hit will return, lured away by higher salary (annual growth c10% this time in 2023). As for the skyrocketing energy and food costs, make no doubt their spike will trigger a surge in new supply as nation after nation capitalizes on the fact that the selling price is well above the marginal cost of production to trigger a “potato cycle” surge in supply. Now, instead of seeing wage growth as a threat, we should see it as an enabler of real wage growth; further support for the UK residential property market, which has, to date, recorded a higher aggregate value (c£7 trillion) and a lower mortgage debt-to-value ratio; more than 8 out of 10 fixed-rate mortgages, all issued since 2008, have been stress-tested to a 4% base rate. What about banks? Well, they came into COVID in macro-prudentially better shape than ever.
Here, of course, one could say that a recession can be caused by nothing more than a simple perception of an impending one (the Keynesian paradox of thrift). Well, with the UK facing a shortage of supply channels, any reduction in demand may actually be a good thing. A good thing, as this will ease price pressures and thus soften the interest rate hike cycle.
Let me turn to the concern that the Chinese lockdown has significantly worsened global supply shortages, not least in the UK, and will therefore lead to stagflation. The reality is that it is in Beijing’s economic interest to reopen as soon as possible. Make no doubt, then the huge merchant armada idle outside Chinese ports will not Rust in the Pacific Ocean water. As to why one can be so confident, the NBK is actively moving its currency sharply lower against the dollar to dampen the trade-weighted surge. It’s been a strategy he’s used before every major export push — in short, don’t expect the global supply paralysis to last.
About mine Interest rate forecast, I expect the UK base rate to be c2% by the New Year and peak at no more than 3.5%. As for the impact of such a tightening on the UK economy, I am confident that it can be comfortably handled and even exceed growth expectations (remember that weak sterling is a form of monetary easing).
If we ignore the fact of the lock-in, this means that UK households have been forced to save at least £240 billion on top of our savings surge in 2008. We also need to remember that a combined £1 trillion of additional housing capital has been generated through Covid and, as mentioned earlier, the UK housing market has never had lower LTVs or a higher proportion of fixed rate mortgages.
In terms of our behavior change Peak Retail penetration of the Internet will surpass the 20% that appeared to be at pre-pandemic levels. As it approaches c30%, it will reduce inflation and increase employment due to the huge operational means of logistics networks and their labor intensity. Such competitive online prices will, in turn, drive down physical prices.
In conclusion, it must be said that you are always faced with Recession Infectious situation, because national economies are so interconnected. It said while it was once so that USA or EU a sneeze gave Britain a cold, so much has changed in Britain’s relations near and far. Changes have also taken place in the inner workings of the UK economy to render this adage redundant. One can draw on a wide range of structural ways in which the UK economy has weathered changes in the US and EU economies. For one thing, much more of the UK’s economic activity comes from within. Whatever the US and EU have in store, Chinese and Indian students, tourists and firms will continue to come to the UK; pay generously if here. Now, if things get worse in the EU – made worse by the crisis in Ukraine – we can be even more confident that EU citizens – up to 750,000 of them – who have been working in the UK but left when COVID hit will return. As for the UK’s goods trade sectors, whatever the EZ holds, there is a renewed support for manufacturing in the UK to make a positive economic difference. In short, expect a recession yes, but not in the UK, but in large parts of the EU and US.
Savvas is the chief economist of Toscafund Asset Management