High prices and weak growth should nip in the bud rising interest rates in the UK and the euro zone | Interest rate
A recession lurks just around the corner. That’s what many economists and financial analysts in the UK and across Europe fear as inflationary pressures collide with Russia’s invasion of Ukraine to undermine the post-Covid recovery.
On Monday, the Office for National Statistics will report on the expansion of the UK economy in February. Any chance of matching January’s GDP growth looks optimistic.
Sanjay Raja, senior economist at Deutsche Bank, estimates that after rising 8% in January – well above most analysts’ expectations – growth will fall to just 0.1% in February, led by a decline of industrial production. “The bad news is that we don’t expect the recent strength in activity to last very long,” he said, adding that a decline in March was also likely, meaning growth of GDP in the first quarter may not even reach 1%.
A contraction in the second quarter is almost certain, given “a larger increase in energy and food bills, higher taxes, a reversal in Covid health care spending, some inventory liquidation in the manufacturing sector and the additional holiday of June”.
Suren Thiru, head of economics at the UK Chambers of Commerce, said the combined growth rate in January and February would appear to be a high point: “When we look at the February figures, it will feel like we are looking into the mirror. shimmer.”
Thiru agrees with Raja that it will be a descent from March for the UK. GDP in the second quarter, from April to June, is expected 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 present, few forecasters suggest the UK is on course for 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 a lot of economic uncertainty right now.
A long war in Ukraine, increased sanctions on Russia and oil prices that remain above $100 a barrel will likely push inflation to even higher levels and undermine business and consumer sentiment that it is is safe to make investment decisions.
A gas price that continues to be more than five times its pre-pandemic level, fueling a cost-of-living crisis, would only make matters worse, Thiru said.
Consumer confidence has slumped in recent months and is now at low levels seen before the second lockdown in 2020. Business confidence has also slumped, according to Lloyds Bank’s Business Barometer. Lloyds said the March drop in confidence was the biggest since the first two months of the pandemic.
The situation could get worse if central banks misinterpret signals from the economy and persist with plans to hike interest rates, said Dario Perkins, an economist at consultancy TS Lombard. He argues that the Bank of England – and possibly the European Central Bank – are about to make a historic mistake that could plunge their respective economies into recession.
Both the Bank and the ECB have spoken strongly about fighting inflation with higher borrowing costs. Financial markets predict that the Bank of England could push its key rate to 2% next year, from 0.75% currently.
“Rapid monetary tightening outside the United States is likely to end in a Trichet-style fiasco,” Perkins said.
He refers to the consequences of the financial crash of 2008 when, seeing commodity prices, and in particular the price of oil, skyrocketing, ECB boss Jean-Claude Trichet was convinced that he had to start raise interest rates.
The heavily indebted Eurozone economy could not cope and in 2012 the continent was plunged into a crisis that nearly ended the euro project.
Albert Edwards, Societe Generale’s global strategist, said the mere threat of higher U.S. interest rates had already made borrowing more expensive and capped the number of interest rate hikes needed. This should prevent the Federal Reserve from pushing its base rate above 1%.
The UK could see rates rise slightly above that level, while the Eurozone, where interest rates are currently negative, could see its first positive interest rate since 2012. But concerns over a Rising rates leading to a recession are almost certain to remain in the hands of most ratemakers.