Inflation and higher interest rates are starting to have a bigger impact on the UK economy.
We all know manufacturing around the globe is in contraction but is the UK to begin to see it in services too?
The PMIs came in poor with the service sector slipping below the 50 level, reaching 48.7 (contraction). Although it is unlikely this will lead to a negative third-quarter GDP, the final quarter of 2023 may well be the tip of a recession, although we will need to wait until Q1 next year for confirmation. Manufacturing PMI now stands at 42.5.
I see similar conditions in the EU too as we move towards the end of this year. European data is starting to be affected by the numerous rate hikes by the ECB and the Bank of England.
The recently released PMI data shows a contraction in services that is now following the decline in global manufacturing and may be signaling early warning signs of a possible recession. Although this will not be seen in GDP until the first half of 2024.
It takes time for rate hikes to feed into the data and, indeed, the economy, and how quickly the economy deteriorates may depend on winter temperatures in Europe. Last winter was very mild and governments will expect it to be repeated this year, however, with El Niño very active, weather fronts can be unpredictable and extreme, producing another mild winter or a very cold one. The latter will see an increase in gas prices as reserves are used at a faster rate and families are forced to use their heating. This will reduce household disposable income, increase inflation and trigger a recession.
Although Europe may enter recession, how deep or long cannot be predicted. I still expect the US to achieve a soft landing, thanks mainly to the trillions of dollars of stimulus added during Covid, which has cushioned the impact of inflation and high interest rate hikes. In addition, due to the lack of available workers, wages have exceeded inflation for middle- to high-end wage earners.
Unemployment levels have been creeping higher and this could accelerate in many countries towards the end of this year and into 2024.
Central banks will accept recession over high inflation every time as they know they can reboot an economy, however, as it’s been proven, they struggle to check inflation. Rates will remain at their peak into 2024 and we should get used to higher rates and remember that zero rates are only for times of crisis not just to provide us with cheap money!