A recession often conjures up the image of tough economic times. Possibly this is due to unpleasant memories of the 2009 financial crisis. In reality, most recessions are little more than a brief period when the economy goes over a bump. All too often, that bump has a silly cause. At the end of 2018, for example, the German economy fell on hard times because too little rain had fallen in the Alps. As a result, the water in the Rhine was so low that no shipping traffic was possible in some parts of the river. As entire factories could no longer be supplied, productivity temporarily decreased. The recession Britain may now be heading for falls into the same category: a combination of pure coincidence and dumb luck.
Recession? Debt from 1952!
The seeds of any recession were sown much more than half a century ago. On 6 February 1952, King George VI of the United Kingdom died. His daughter Elizabeth succeeded him and early this year she was on the throne for exactly 70 years. This, of course, needs to be celebrated and one way of doing so is through an extra day off in early June. As a result, the second quarter has one less working day than the same period last year. And that could make just the difference between minuscule economic growth, or a very small contraction. Indeed, like mainland Europe, the UK economy is already increasingly feeling the pain of higher energy prices and sharply rising inflation.
Energy and inflation: the pain is temporary
That combination is causing UK households' purchasing power to fall by almost 2 per cent. That is the highest level in more than 50 years. By comparison, purchasing power fell by 1.5 per cent after the financial crisis. The good news is that this is only a temporary phenomenon. Unless energy prices fly through the roof again in the next 12 months, inflation will gradually decline. Moreover, UK consumers are gaining some financial room, thanks to the tight labour market translating into higher wages. On the currency markets, by the way, there is no sign of an approaching recession in the pound's exchange rate.
All eyes on the interest rate market
Although the British currency has taken a step back in recent days, against the euro the pound is more than 5 per cent higher than a year earlier. Despite all the exchange rate fluctuations (exporters: remember to hedge your currency risk), the currency is hovering against its highest level in more than five years. This should not change for the time being. Indeed, the currency world is paying very close attention to the interest rate market. The Bank of England has its foot firmly on the accelerator with three rate hikes since last autumn. Meanwhile, the European Central Bank hardly dares to touch the gear lever. As long as that interest rate differential widens rather than narrows, not even Queen Elizabeth's jubilee can throw a spanner in the works for the pound.
Joost Derks is currency specialist at iBanFirst. He has over 20 years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.
