UK on recession watch

Britain has been placed “on recession watch” after the economy shrank for the second month in October. In the month when Labour marked its first 100 days in office, Britain’s dominant services sector showed no growth, and both the production and construction industries contracted.

UK GDP fell by 0.1% according to the ONS (Office for National Statistics) following a 0.1% decline in September.

Julian Jessop, an economics fellow at the IEA (Institute of Economic Affairs), said the data “should put the UK firmly on recession watch”.

Currency Exchange Rates Update

The Pound Sterling to Euro exchange rate has spent 85% of the time since the 2016 Brexit vote trading between €1.11 and €1.20 interbank. It’s spent less than 1% of its time above €1.21 interbank, a level reached on both 11 and 12 December.

In 2024, the pound-to-euro exchange rate traded within its third smallest range (6.6%) in over a decade and recorded nine monthly advances. It’s the first time in eight years that it hasn’t traded lower than €1.14 interbank.

Then came Friday’s drop with the possibility of more trouble to come this week with a torrent of UK economic data due including PMI (Manufacturing) data on Monday; employment and wages data on Tuesday; inflation on Wednesday; the BoE (Bank of England) next interest rate announcement on Thursday and retail sales on Friday.

The US Dollar’s share of all international payments has risen steadily over the past 12 years from 30% to just under 50%. The Pound has remained steady at just under 10%. The Euro is the standout loser with a market share that has fallen from 45% in 2012 to just over 20% today.

What’s in the news?

UK

Good news

The RICS (Royal Institute of Chartered Surveyors) house price indicator rose to +25% in November, up from +16% last month and the highest since September 2022.

Not so good news

The OBR (Office for Budget Responsibility) reported that Britain’s workforce will shrink to a record low after a surge in the number of people who are too sick to work. The data shows the share of over-16s in work or looking for a job will never get back to pre-lockdown levels, as an ageing population and rising ill health leave a permanent scar on the economy.

Accountants BDO reported that the number of UK job vacancies in November fell at the fastest rate since August 2020 and business confidence slumped to its lowest level in almost two years.

Fellow accountants KPMG and REC (Recruitment and Employment Confederation) reported that the number of job vacancies in the UK fell at its fastest pace in over four years in November as firms held off hiring due to the government’s Budget tax hikes. The survey also showed that the number of job openings fell at the sharpest pace since August 2020 as demand for staff dried up following the Budget.

A survey released by the BoE suggested that 54% of firms were planning to cut staff as a result of the national insurance hike. Analysis by Deutsche Bank suggests that as many as 100,000 jobs could be lost.

The electricity grid has burned record amounts of gas to keep the lights on after a dunkelflaute (a German word describing minimal sunshine and wind for an extended period) weather event knocked out swathes of the country’s wind and solar farms.

Ofgem, the energy regulator, has launched a consultation on how to tackle what it calls the “unsustainable” level of heating and power debts built up by households during the energy crisis. Options being looked at include extra charges on the bills of households not caught up in the crisis, levies on energy suppliers or a mixture of both. It means millions of people could face higher bills to pay off the debts of others.

Farmers are braced for ￡600m of collective losses after poor weather led to the second-worst harvest on record.

USA

US SME (Small and Medium Enterprises) optimism surges the most in 44 years following President-elect Trump’s victory according to the NFIB (National Federation of Independent Businesses).

US inflation rose to 2.7% in November as the Federal Reserve considers how quickly to press ahead with lowering interest rates. The Fed next announce on interest rates on Wednesday.

The EU

The ECB (European Central Bank) lowered eurozone interest rates for a third consecutive meeting and for the fourth time this year as inflation nears 2% while the economy struggles. It takes the deposit facility, the ECB’s key rate to 3%.

In its forward guidance, the ECB also removed its repeated message that it needs to “keep policy rates sufficiently restrictive for as long as necessary” and lowered its inflation forecast for 2024 from 2.5% to 2.4%. The inflation outlook for 2025 was also taken down from 2.2% to 2.1% and sees the eurozone economy growing at 0.7% in 2024, down from its previous forecast of 0.8%. Growth in 2025 is seen at 1.1%, down from a previous projection of 1.3%.

The EU has signed a deal with Mercosur (Argentina, Brazil, Paraguay, Uruguay and Bolivia) that will remove tariffs and encourage trade between Latin America and the EU. France had already voted overwhelmingly but fruitlessly against the trade deal since it will be against the interests of its farming community.

The Bundesbank (German central bank) has warned the country faces another year of economic stagnation even in a best-case scenario as it slashed its 2025 growth forecast to just 0.1% and added that a trade war with the US could push Europe’s largest economy into recession.

Like the UK, Germany is also suffering from a dunkelflaute that has sent German power prices to their highest level for almost 20 years.

The German Federal election is due on 23 February and Chancellor Scholz has beaten off challenges from within his party to lead the SPD into it. Polls suggest the SPD will capture just 15% of the vote which puts them third and with the worst level of support since the nineteenth century.

French President Emmanuel Macron named centrist Francois Bayrou as his fourth prime minister of 2024, concluding a week of political deadlock following the toppling of Michel Barnier’s government. Bayrou will now face many of the same pressures as his predecessor, with the left and right expected to harass the new government for their own agendas for the 2025 budget.

Others

The BoC (Bank of Canada) cut interest rates by 0.5% for the second consecutive month. However, the forward guidance from BoC Governor Tiff Macklem was surprisingly hawkish in tone, saying future cuts will be more gradual, giving the Canadian dollar a welcome reprieve in the currency markets. The BoC has already lowered interest rates by a total of 1.75% in 2024, more than any other G10 central bank this year.

In contrast, the BCB (Banco Central do Brasil), Brazil’s central bank increased its benchmark interest rate by 1% and promised to deliver two further rises of the same size in the next two meetings as it rushes to recover investor confidence and tame inflation expectations by boosting the Selic (Brazil’s base rate) to 12.25%.

The war in the Ukraine is in its third year and Russia is losing the economic conflict. The Kremlin’s oil export revenues are too low to sustain a high-intensity war, and nobody will lend Vladimir Putin a kopek leading some analysts to compare Russia’s overheated war economy looking much like the dysfunctional German war economy of late 1917. The Russian central bank has raised interest rates to 21% this year to choke off an inflation spiral.

Sergei Chemezov, head of the defence giant Rostec, said: "If we continue like this, most companies will essentially go bankrupt. At rates of more than 20%, I don’t know of a single business that can make a profit, not even an arms trader”. Some 800,000 of the young and best educated have left the country. The number slaughtered or maimed is approaching half a million. Russia’s digital minister says the shortage of IT workers is around 600,000. The defence industry has 400,000 unfilled positions. The total labour shortage is nearly 5m.

Total export earnings from all fossil fuels were running at about $1.2bn a day in mid-2022. This has fallen for the last 10 months consecutively and is now barely $600mn a day. Putin is raiding the National Wealth Fund to cover the shortfall. Its liquid assets have fallen to a 16-year low of $54bn. Its gold reserves have dropped from 554 to 279 tonnes over the last 15 months. The fund is left with illiquid holdings that are hard to crystallise.

Few foresaw the sudden and total collapse of the Soviet regime in 1991, though all the signs of economic decay and imperial overreach were there to see by 1989. Putin’s regime is not yet at this point, but it would only take one more change in the Middle East to bring matters to a head. If, for example, the Saudis decide, as some predict, to flood the world with cheap crude to recoup market share and oil prices fall below $40 a barrel, the Russian economy could spin out of economic control.

Quote

US President Calvin Coolidge, “Christmas is not a time nor a season, but a state of mind”.