Morning Brief – UK Recession – coming, going, gone?

Charles Porter
Thu 22 Dec 2022

UK Recession – coming, going, gone?

Last week’s saga of central bank decisions has already been well analysed and digested. The implications for the policy adjustments made last week have been scrutinised and speculated over. Ultimately none of the central banks that met from the Fed, the ECB and Bank of England, nor any other of the non-Eurozone European central banks that met last week, provided any material change to policy guidance. The Fed and ECB both came out noticeably hawkish with the Bank of England arguably slipping behind with its 2023 commitments towards raising rates. There was however one key differentiating factor: growth and the Bank’s approach to and perception of any impending challenges to growth. These growth forecasts that underly the headline policy action have been less extensively covered and may hold critical implications for FX in the year ahead. 

Let’s start with the Fed. The Fed’s approach was to sacrifice growth. The Chair in his communication of the policy decision made it clear that he would throw growth to the wind demoting its significance in the face of their priority: taming inflation. The Fed has a broad mandate allowing it to take considerations of the wider economy in deciding its monetary policy path. Whilst you may say we could identify a risk from this language to US growth it is likely a Red Herring placed to add credibility to the Fed’s commitment to tackling the price level. Because the Fed has one of the strongest economic fundamentals with which to emerge following its battle with inflation it can afford to anecdotally sacrifice growth to boost its credibility and likely future success in flighting inflation. 

Where to start with the ECB. A hawkish tilt to policy boosted the Euro last week, that’s for sure. The European Central Banks could also be bluffing the market but with a very different poker face and hand to that of Jay Powell. The ECB tells us that it doesn’t expect to see a recession next year. Observed fundamentals in the European economy price the probability of not getting a recession in real or technical terms within very marginal percentiles. The ECB’s position on growth from my perspective is destructive by virtue of how unrealistic it is. It is likely trying to suggest it doesn’t see a recession to protect intra-zone yield spreads from blowing out when hiking rates into an uncertain period. However, when the ECB wakes up next year with a recession and still above-target inflation it could make its own job ten-times harder and the Euro noticeably weaker.

In the UK it is becoming more apparent that we are either in or entering a recession. Consumers have been observed to reign in spending in the face of a cost of living crisis. Retail sales by volume fell month on month to November by 0.4%. Fast moving soft data, including the Purchasing Manager’s Index, continues to indicate that the economy is in a contractionary phase. The UK has likely already entered a recession but unlike our similarly fated Eurozone neighbours, at least our central bank saw it coming and has created policy in an environment of known risk. That being said, statistics could still present a risk to the Pound should realised figures undershoot expectations.

Discussion and Analysis by Charles Porter

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