The 2022-23 Economic Crisis Megathread

[Tamas]

UK GDP declined by 0.3% in April, adding to the 0.1% drop in March -- with services, production and construction all shrinking in April.

Transitionary recession ongoing.

[Sheilbh]

Yes

As pointed out by many economists there is likely to be a recession, but this isn't it. It's from the shutting down of test and trace and the wind down of vaccine program - if you strip them out of the numbers then it's still growing (https://twitter.com/edconwaysky/status/1536258872054530048?s=21&t=WCKXQtkihJAB1yc51BEhUg).

So very much a transitory figure, but I think a real recession is coming.

Interesting on size of spending on testing in the UK - from the start of the pandemic to it being shut down it's been twice the size of our manufacturing or construction contribution (growth) to GDP in that period.

[Tamas]

To be fair, as I understand a recession should solve/help the inflation problem and in fact we likely going to need a recession to stop inflation.

[celedhring]

I don't know, given that a significant part of the inflation comes from supply shocks, we might just get stagflation. Hooray.

[The Minsky Moment]

It's a close race between politicians, traders and economists as to who has the shortest term memory . . .

From 2011-2014, oil prices hovered around and over $100 per barrel.  During the earlier part of this period, from around 2010-12, the world also experienced a food price hike, and this all took place at the tail end of massive secular commodities supercycle.

The effect on inflation in the OECD was non-existent; indeed, countries continued to struggle with deflationary pressure.

It is natural to focus on oil and food prices - they are "headline" commodities prices regularly and heavily covered in the financial press that people can intuitively understand and that has direct impact on daily lives.  It is natural to draw causal conclusions from correlations between big movements in these prices and other macro developments but a broader historical perspective shows it is important to focus on underlying trends and causes.  High oil prices have existed alongside inflations but also alongside disinflations.

It is also natural for "Western" commentators to focus on developments in the US and Europe and perhaps Japan - countries with free presses and similar economic systems and similar political systems.  But the largest manufacturer and trader in the world is China and its massive population and economy, well-integrated into other advances economies, has a huge impact.  But a problem is that China is hard for westerners to understand - its political system doesn't work like ours, its economy doesn't work like ours, public and private finance doesn't work like ours, and its press is not free.  All presenting big obstacles to understanding.

In the first half of this year there have been momentous economic events in China including, among others, complete shutdowns of entire mega-cities due to COVID, fallout from a complex real estate-public finance crisis, and internal debates over economic rebalancing.  IMO it is a fools errand to start making pronouncements about the state of the world economy and its likely prognosis without careful consideration of the impact from China.

Another crucial long-term factor affecting the world economy that always has to be kept in mind is the extraordinary demographic collapse among rich and middle income countries. It is my view that Western countries have not properly thought through the economic implications of pursuing restrictive immigration policies and stoking nativism at the same time the population dives far below replacement.  In particular, the US economy has always been designed on the assumption that labor will always be or become available in response to new technological developments, new markets, shifts in regional economic activity and/or shifts in demand or preferences. If that assumption fails to hold, it is not clear how the US economy will respond.

[Tamas]

Unless these indicators are lagging a bit, Bank of England might be saved the indignity of having to manually trigger a recession like their US counterparts, as people's salaries fail to follow inflation upward.

UK pay falls at fastest rate in more than 20 years
Regular real pay in the UK fell at the fastest rate this century in April, as wages fell further behind rising prices.

In April alone, regular pay packets (excluding bonuses) shrank by 3.4% once you adjust for inflation. That's the biggest monthly fall, year-on-year, in at least 20 years, today's data from the Office for National Statistics shows.

Also I think some people drawing the conclusion I have heard from the US as well: older people who had their savings boosted during the pandemic heydays have left the job market and will not return:

There are still nearly 450,000 more people neither working or looking for work than before the pandemic, despite a small drop in economic inactivity in April.

That includes 225,000 more people with long-term sickness, and 26,000 temporarily ill.

[mongers]

Unless these indicators are lagging a bit, Bank of England might be saved the indignity of having to manually trigger a recession like their US counterparts, as people's salaries fail to follow inflation upward.

Crisis? What Crisis.

Oh look over there, there's somebody trying to build a border wall in the Irish sea and aren't those people turning up in boats in Kent of the wrong skin colour, unlike our glorious Saxon native ancestors.

[Josquius]

They're not even trying with the Rwanda excuses are they.
It's to stop human trafficking...
But Africans still have to be trafficked across a desert and two seas to be sent to Rwanda.
Why not just.... Let them apply for UK assylum in Rwanda if that's the goal?

[Tamas]

This is the global economic crisis thread, not the Save Big Dog thread. 

[Tamas]

Drama in Zurich, where Switzerland's central bank has surprisingly raised interest rates from record lows.

The Swiss National Bank raised its policy interest rate for the first time in 15 years, up from -0.75% to -0.25%.

This 50-basis-point rise makes the SNB the latest central bank to lift interest rates to fight inflation.

This is the first interest rate rise by the SNB since Septenber 2007; it had kept borrowing costs at -0.75% since 2015.

Thomas Jordan, chair of the SNB's governing council, said the bank decided to tighten monetary policy to counter increased inflationary pressure.

It will be funny when Bank Of England will stick with a 0.25 hike later today.

[mongers]

Drama in Zurich, where Switzerland's central bank has surprisingly raised interest rates from record lows.

The Swiss National Bank raised its policy interest rate for the first time in 15 years, up from -0.75% to -0.25%.

This 50-basis-point rise makes the SNB the latest central bank to lift interest rates to fight inflation.

This is the first interest rate rise by the SNB since Septenber 2007; it had kept borrowing costs at -0.75% since 2015.

Thomas Jordan, chair of the SNB's governing council, said the bank decided to tighten monetary policy to counter increased inflationary pressure.

It will be funny when Bank Of England will stick with a 0.25 hike later today.

Can't have those Buy to Let mortgages get too expensive (not as heavily subsidised).

[Tamas]

Indeed!

And true enough, the hike is just 0.25. I am sure, like with Brexit, it is the rest of the world who got it wrong and we are doing it right.

[crazy canuck]

There is also some possibility the UK has inflationary pressures which are mostly eternal or otherwise cannot be addressed by a large rate hike.

[alfred russel]

Indeed!

And true enough, the hike is just 0.25. I am sure, like with Brexit, it is the rest of the world who got it wrong and we are doing it right.

The USD is already near parity with the euro. If the UK wants to be very dovish with interest rate hikes maybe we will get to parity with the GBP too. 

[Sheilbh]

Indeed!

And true enough, the hike is just 0.25. I am sure, like with Brexit, it is the rest of the world who got it wrong and we are doing it right.

It's an odd world where their fifth rate rise in six months is seen as dove-ish though They've raised rates from 0.1% to 1.25% over six months largely through incremental increases - as I say this is the fifth rate rise.

The Fed, I think, has gone from 0.25% to 1.75%. But they've done that through larger increases so I think they've only raised rates three times.

The ECB is still at 0 but is signalling two things at once which are important (and challenging) in this context. One is that they are going to raise rates; the other is because we're starting to see spreads increase that they will continue to basically do "whatever it takes" to keep the Eurozone a single monetary area rather than seeing rate rises have a different impact in Italy than Germany.

The BofE isn't being particularly dove-ish and is acting a little bit more like the Fed than the ECB.

Interesting key points - which he provides in more detail from Duncan Weldon:

1/Growth is undershooting the MPC's forecasts (made last month) and they now expect a contraction in the second quarter.
 2/The Government's Cost of Living Package is (perhaps) a smaller deal than I assumed.
3/Things are going to get worse on the inflation front before they get better.
4/The Bank is still very optimistic on the health of the jobs market.
5/Rate hikes are having differing effects.

The last point is particularly interesting that there's pass-through of rate hikes is happening largely for mortgage offers and the spread between low LTV and high LTV is narrowing - but basically rate changes are passing through as they did pre-financial crisis (not like the slightly weird 2010s). But as other central banks are also hiking, sterling is still getting weaker.

There's all the talk in the US of whether they will be able to get a "soft landing" - which I think looks less likely. As I say in Europe I think the factors in inflation are a little different - so there's a risk for the BofE and UK that they're hiking fast enough to slow an economy that was already struggling (unlike the US) but not fast enough to remove pressure on sterling in a way that might relieve some of the inflationary pressure. So basically they make gains on inflation domestically with a weaker economy, but increase it through imported cost pressure.