According to Stephen Bell, chief economist at Columbia Threadneedle, the outlook for the United States and Europe is not rosy. But he wrote in his weekly commentary that he is only really concerned about the UK.
Federal Reserve Chairman Jerome Powell demonstrated his determination at Jackson Hole last week to keep raising interest rates until inflation is under control. This is not what the markets expected, Bell says. Markets had been expecting a Fed reversal from early next year, which should see interest rates drop significantly for the remainder of 2023. Now one can only expect a faster tightening followed by a modest decline. In addition, the Fed acknowledges that unemployment needs to rise to curb inflation. So I think stagnation is absolutely necessary.”
“I think stagnation is absolutely necessary.”
Bell notes that inflation is high and rising in Europe, but food and energy prices are the main driver here. With Russia restricting supplies, gas prices have gone up 20 times, that’s 2,000%! These high energy prices are undoubtedly pushing Europe into recession. Yes, interest rates should go up here, but the local causes of inflation – wages and rent – are not as important here as they are in the United States. All bad news for risky investments like stocks.”
Bell said the outlook for the UK was even more worrying. The country has been in debt for decades, which Bell says can no longer be sustained. He said currency weakness is now a real possibility. If Liz Truss becomes the new prime minister as expected and responds to the crisis with ill-considered tax cuts, deficits will continue to rise. After that, inflation will rise further, families will not be able to pay their energy bills and we will end up once again in a political crisis. Kwasi Quarting is likely to become finance minister and shares his distrust of the Treasury and the Bank of England (BoE). He will have to stand firm to persuade the new prime minister to renege on her campaign promises so quickly.”
Bale said Truss’ plans to manipulate the BoE’s mandate are also worrying financial markets. “Truss’ plan to freeze energy prices through a government-backed fund is a high-risk strategy,” Bell says. “The plan is to allow the government to lend money to energy companies that have to repay loans when gas prices are low. The result is lower inflation, and lower growth in measured bonds.” , lower Social Security benefits, higher personal income. It can even prevent a recession. But the plan involves “open subsidies” based on a sharp drop in gas prices. In short, it may be a high-return strategy, but it also involves high risk.”
Bell sees very worrying prospects for the UK in general and the pound in particular. It was remarkable that – when the unexpected rise in inflation became known two weeks ago – expectations about future bank interest rates rose sharply. This would normally attract capital inflows and boost the British pound, but the currency has not recovered. According to many analysts, we see such a reaction quite often in emerging markets – a banking analyst went so far as to describe the UK as a banana republic. This is exaggerated. But with the current account deficit moving around 5% of GDP and gas prices skyrocketing, there is a real risk that the pound will fall against a strong dollar. The all-time low was $1.05 in February 1985, just above parity. Maybe we’ll see that level again.”
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