The 2022-23 Economic Crisis Megathread

[Tamas]

UK to enter recession, Bank of England warns
The Bank of England is also warning that the UK economy will enter recession later this year.

The Bank has cut its growth forecasts, and now sees the economy falling into recession from the October-December quarter.

In a grim warning about the economic outlook, it says:

GDP growth in the United Kingdom is slowing.

The latest rise in gas prices has led to another significant deterioration in the outlook for activity in the United Kingdom and the rest of Europe. The United Kingdom is now projected to enter recession from the fourth quarter of this year.

Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative.

The Bank of England's new forecasts are frankly dire:

Governor Bailey has brought charts...

1990s style recession... lasting as long as both 1990s and Great financial crisis (though not as deep as that one)...



Inflation now predicted by BoE to peak at over 13%... and staying close to 10% most of next year...

EDIT: of course the FTSE100 is up 0.5% on the day because of reasons.

[Sheilbh]

EDIT: of course the FTSE100 is up 0.5% on the day because of reasons.

Sterling fell which is broadly good for the FTSE100 - over 70% of their revenue is generated outside the UK so it boosts their earnings from overseas.

But yeah the whole scenario looks fairly grim (though I'd note that their inflation projections basically entirely depend on what happens with the price cap): high inflation for at least two years, a prolonged recession like the early nineties and unemployment heading up to about 6.5%. Not great on any front.

It still seems mad that going into a recession they're raising rates but....

[Tamas]

It still seems mad that going into a recession they're raising rates but....

Well this is where they messed up. They were sitting on their arses worried they might cause a bit of a blip in the housing market and didn't start rate hiking early enough. Now they don't have the room to maneuver to ease and prevent a recession - they need to try and contain inflation somehow (I can't see how 50bps hikes coming up from 1.25% are going to cut it with 13% inflation) and it will be, by the recession.

In the US the Fed might have gone aggressive enough (they definitely were also late to start) to have a slight room to maneuver when the recession hits, but even that is pretty uncertain (the markets are pricing in this scenario, but I don't think they'll pull it off).

[Berkut]

We just had an HR meeting to discuss salary adjustments for the rest of 2022 and 2023. The issue of the CPI being up 9.1% over June of 2021 came up, and everyone was all kind of like "Holy shit! We can't actually give everyone a 10% raise just to keep up with inflation!"

I have no idea how we can respond to that.

[Josquius]

Some kind of "well. We don't have to pay them properly. But retention etc.. Etc..."

I've gotten a massive pay drop due to this stuff and no pay rise

[Tamas]

It kind of helps drive home for me the level of inflation that due to a promotion I actually did receive a 13%-ish pay rise at the beginning of this year. It's a big noticeable jump yet all that will manage by the end of this year is to keep me in real terms where I was at the start of it. And I am one of the lucky ones with a non-terrible wage that got a big boost. 

I guess, the Bank of England president would file me under the causes on inflation, having accepted a salary increase.

[Berkut]

Some kind of "well. We don't have to pay them properly. But retention etc.. Etc..."

I've gotten a massive pay drop due to this stuff and no pay rise

I don't think it is a question of desire to pay anyone properly or not. We definitely want to pay everyone properly, the cost of not doing so is high.

But what is "properly"?

[Sheilbh]

Well this is where they messed up. They were sitting on their arses worried they might cause a bit of a blip in the housing market and didn't start rate hiking early enough. Now they don't have the room to maneuver to ease and prevent a recession - they need to try and contain inflation somehow (I can't see how 50bps hikes coming up from 1.25% are going to cut it with 13% inflation) and it will be, by the recession.

In the US the Fed might have gone aggressive enough (they definitely were also late to start) to have a slight room to maneuver when the recession hits, but even that is pretty uncertain (the markets are pricing in this scenario, but I don't think they'll pull it off).

I'm just not sure I see a massive difference - I do with the ECB (and I think the ECB are right). The BofE started raising rates in December and have increased them by 1.65%, the Fed started in March and have raised them by 2.25%. The BofE's been a little more gradual over a longer time, the Fed's been a little more aggressive in a shorter period of time - but it doesn't seem that significant.

As ever I thought Duncan Weldon was interesting on this. Key points were that it is important to remember this assumes no change in fiscal policy - and there will be changes in fiscal policy. There is going to be an emergency budget and some combination of tax cuts, bill rebates and possibly other support - and possibly some fiddling around the cap.

But hiking rates into an inflation feels like the BofE MPC have decided - a point made by Chris Giles - that the only way to bring inflation back to target is through a recession.

The international comparison point and stuff on unemployment strikes me as most striking though:

The nature of Britain's inflation

The most interesting analysis in the Report is Box E on international comparisons of inflation.


The cross-OECD picture is a useful reminder that high headline inflation is global in nature.

The Bank further notes that, as expected, energy and food inflation have picked up sharply globally. But when it comes to services and core goods there is some evidence of an Anglo-American vs Euro area divergence (partially offset by Euro area energy price inflation being higher).

Core goods price inflation in the UK was 6.5% in June, higher than the euro area, where it was 4.3%. Some of the strength of goods price inflation in the UK relative to the euro area might reflect a normalisation in price levels. Clothing and footwear prices were particularly low in the UK in 2020 because of discounting in the pandemic; inflation in this component has subsequently been higher than in the euro area. US goods price inflation picked up earlier than elsewhere, reflecting particularly strong demand, especially during the pandemic. Core goods price inflation has been somewhat higher in the UK than the euro area recently. This might reflect some UK prices recovering from unusually low levels in the pandemic. It may also reflect the tighter labour market. Higher goods price inflation in the UK and US compared to the euro area may also reflect labour market tightness. Although services inflation is often assumed to be a clearer indicator of domestic inflationary pressures, almost all goods embody some domestic labour input as well. As a result, higher goods inflation might reflect some of the same drivers of higher services price inflation

The broad brush way to think about this - in terms Andrew Bailey used at a recent press conference - is that Euro area inflation is primarily an energy price story, US inflation is a tight jobs story and British inflation is a bit of both.

Watch the labour market

Almost as interesting as the comparative analysis of inflation dynamics is the deep dive into the labour market in chapter 3.

I really like this chart on labour demand and labour supply.


The basic story is that labour demand recovered much faster from the pandemic than labour supply. The Bank's analysis of the labour supply story is some I will be returning to next week.

But when it comes to their jobs market outlook, I was struck by the final paragraph:

On the other hand, labour market tightness could unwind more quickly. The labour market may respond more rapidly to slowing demand. Recruiters mentioned that greater economic uncertainty and rising costs were already slowing hiring according to the June KPMG/REC UK Report on Jobs. The Covid-related factors weighing on participation could also unwind faster than assumed in the baseline projections if, for example, the very recent decline in inactivity continues at the same pace over the coming months. Labour supply growth could also be affected by how households respond to the real income squeeze. Households may seek to boost income through working more, which could involve those currently inactive re-entering the labour market or those already in the labour force seeking to work longer hours. Although, if unemployment starts rising, households may become discouraged from entering the workforce as fewer jobs are available.

I'm more pessimistic on the jobs market than the MPC. What they outline as a possibility feels closer to my own base case. If real household income takes a large hit and consumption falls then I can see the current tightness in the jobs market unwinding pretty swiftly indeed. I don't see labour-intensive consumer facing firms posting anywhere near as many job ads if the Bank's outlook is even half right. Similarly, although it is a smaller part of the supply story than chronic illness, I can easily see a substantial proportion of the 50- and 60-somethings who chose to retire earlier than planned in 2020 and 2021 rapidly reassessing that decision in the face of a real income shock.

[Crazy_Ivan80]

Some kind of "well. We don't have to pay them properly. But retention etc.. Etc..."

I've gotten a massive pay drop due to this stuff and no pay rise

Belgium has automatic indexation of wages. And while that is nice for the employees, it's hellish for overall employment as it makes employing people too expensive when compared to our neighbours. Especially if you take into account that most left of center parties here are run by retards or communists.

[Josquius]

Some kind of "well. We don't have to pay them properly. But retention etc.. Etc..."

I've gotten a massive pay drop due to this stuff and no pay rise

Belgium has automatic indexation of wages. And while that is nice for the employees, it's hellish for overall employment as it makes employing people too expensive when compared to our neighbours. Especially if you take into account that most left of center parties here are run by retards or communists.

So... You're saying Belgium isn't a half bad place to work?
My gf is actually keen on there as a compromise to my yearning for Holland or the nordics

[Crazy_Ivan80]

Some kind of "well. We don't have to pay them properly. But retention etc.. Etc..."

I've gotten a massive pay drop due to this stuff and no pay rise

Belgium has automatic indexation of wages. And while that is nice for the employees, it's hellish for overall employment as it makes employing people too expensive when compared to our neighbours. Especially if you take into account that most left of center parties here are run by retards or communists.

So... You're saying Belgium isn't a half bad place to work?
My gf is actually keen on there as a compromise to my yearning for Holland or the nordics

Nope. Only people on the outside would say that, but they're generally ignorant on the country.
My advice: go to Holland or the Nordics. They have a state that is actually performance, when compared to Belgium.

[Admiral Yi]

EDIT: of course the FTSE100 is up 0.5% on the day because of reasons.

Of course yes.  The market knows that if GDP falls then fewer central bank rate hikes will be required.  Fewer hikes is good for the market.

[Tamas]

EDIT: of course the FTSE100 is up 0.5% on the day because of reasons.

Of course yes.  The market knows that if GDP falls then fewer central bank rate hikes will be required.  Fewer hikes is good for the market.

Yeah that's a valid argument (I mean, I think it is mistaken, but understandable) in case of the US, but one would think the UK economy is in a far more vulnerable position than the US one, interest-free YOLO money available or not.

[Admiral Yi]

Yeah that's a valid argument (I mean, I think it is mistaken, but understandable) in case of the US, but one would think the UK economy is in a far more vulnerable position than the US one, interest-free YOLO money available or not.

Margin lending rates are significantly higher than the Federal Funds rate.

The relationship between interest rates and stock prices is not based on leverage (brokerages will lend you your entire position), but on the causal link between interest rates and the rate at which future earning of growth stocks are discounted.

[Tamas]

Bank of England governor sticks with his primary policy: asking people not get paid more:

BoE governor warns against high pay rises and price increases
The Bank of England governor has urged workers and businesses to resist pushing for high wage and prices to match inflation.

He tells the Today Programme this would fuel inflation and hurt the least well off in society..