13 February 2023: Economy grew by just 0.4% in 2022


  • The UK avoids recession by a hair’s breadth
  • Hard or soft, or how about no landing at all?
  • Baltics dragging inflation higher affecting rates
GBP – Market Commentary

Can recession be judged over two quarters?

The UK economy failed to expand at all in the fourth quarter of 2022, but the fact that it didn’t contract either can be seen as a positive, as it means that the country didn’t suffer the ignominy of being the only G7 economy to actually suffer a recession.

There have been doubts raised regarding the whole two quarters of negative growth denoting a technical recession and while it may be practical to provide the financial markets with a guide to a nation’s performance, in reality it has no practical meaning.

Judging a country’s performance over a period of two months to decide if it is contracting is an impractical notion. There are so many moving parts that contribute to a recession that simply to say the accepted two quarters of contraction means nothing in the real world.

Two half yeast of negative growth would be a more suitable period over which to judge a country’s performance, but for now, the Government can breathe a sigh of relief that it was enough of a close call to mean that it got away with it.

The Chancellor of the Exchequer commented that while the fact that the country did not suffer a recession in 2022 is welcome, it is not out of the woods yet. There are still hard decisions to be made, inflation is still too high, government borrowing needs to be brought under tighter control, public sector pay deals need to be struck, and output from both manufacturing and services is not where it needs to be.

Jeremy Hunt will present his budget to Parliament next month and despite his pledge to only cut taxes when inflation is half its current level, several commentators, investors and economists believe that he may have sufficient wiggle room to provide a little relief, particularly since the level of taxation in the UK is at its highest level for a generation.

Last week, AstraZeneca, the global biopharmaceutical company announced that it was relocating a larger part of its business to Ireland since it found that the UK was no longer competitive, and Brexit had caused supply chain difficulties while it didn’t notice a decline in the level of bureaucracy that had been expected.

The pharmaceutical sector doesn’t benefit from the same advantages that oil and gas companies receive. Although they have to pay a windfall tax, energy firms are able to offset a great number of research expenses as well as the cost of upgrading facilities to comply with environmental issues against their taxation in the UK.

Last week, the market saw a degree of clarity in Central Bank monetary policy decisions as comments following the previous week’s rate hikes sank in. The pound was fairly flat in the week after significant losses over the previous period. It closed on Friday at 1.2054, challenging the lower point in the recent trend but not seriously challenging major levels of support.

USD – Market Commentary

A hard or soft landing is virtually impossible to predict

There is no singular agreement from economists or market practitioners about whether the country will see a recession this year. Talk of hard or soft landings and recessions that are short-lived miss the point about the practicalities of Central Bank actions.

It goes without saying that the Fed would like to engineer a cyclical slowdown in activity that avoids a contraction in the economy, but since its mandate deals with employment and price stability, it has other priorities.

The level of employment, where the economy was able to create more than 500k new jobs in a single month even if the Central Bank was not targeting that area of the economy is close to miraculous, even if there were significant one off factors at play. The market would have been eminently satisfied with an NFP figure of half that amount in January.

The FOMC is clearly targeting inflation, having increased rates from zero to 4.5% since last spring, but even though it slowed the rate of increase at its most recent meeting, prices are not yet under control.

Jerome Powell has been a little woolly in his guidance to the markets since the turn of the year. It is fairly clear that he is not in agreement with some of his colleagues on the FOMC, and this is creating a reticence to deliver a clear indication of the Bank’s intentions. It is not sufficient to consider himself to be data driven. The market deals in absolutes and considers a Fed Chairman who cannot or will not work to those parameters to be unhelpful at best and possibly disruptive.

The latest inflation figures will be released later this week and while they are expected to show a fall given the fact that the FOMC slowed the rate it is tightening monetary policy, the size of the fall is open to conjecture.

Since there has been a significant fall in the price of gas and the oil price has stabilized, there has been a closing of the gap between headline and core price increases.

Headline inflation is expected to have fallen to 5.8% from 6.55 in December. Although given that short term interest rates are close to restrictive territory there is the possibility of a downside surprise.

The dollar index had its third positive result in as many weeks. It rose to a high of 103.96, but still has insufficient momentum to challenge short term resistance around 104.20. It eventually closed at 103.57, although it has started the new week in marginally positive fashion.

EUR – Market Commentary

Weaker economies cannot be driven by Baltic inflation

Whisper it softly, but the more dovish members of the rate-setting council of the ECB appear to be coming round to the idea of higher rates being necessary to counter the negative effects of high and continuing inflation.

Italy’s Central Bank Governor, Iganzio Visco, commented on Friday that the ECB must avoid unnecessary rate hikes. While stating the obvious, he failed to define what would constitute an unnecessary hike. Presumably he feels the consensus is that if inflation is coming down at an acceptable pace that the Central bank would be able to scale back the pace of rate increases.

There is concern developing among the weaker, more indebted countries that the Baltic States of Estonia, Latvia, and Lithuania have rates of inflation that bear no relation to the rest of the region and should therefore be considered outside the sphere of influence of the ECB.

With inflation rates of over 20% in Latvia and Lithuania and 18.5% in Estonia, creating monetary policy with those countries in mind is almost impossible.

These three countries do, however, make up almost 15% of the twenty nation Eurozone, although in terms of population they are just 1.75% of the entire size of the Union.

It is clear that there are forces at play that determine the strategic importance of the Baltic to the security of the European Union, so they remain an important part of the group.

It is expected that unemployment will have risen across the entire Eurozone when data is released tomorrow. In keeping with the rest of the G7, there has been little issue with job creation in industrialized nations. The final cut of GDP data will also be published tomorrow, but there is no expectation of any surprise.

In the fourth quarter, the Eurozone economy is expected to have growth by 0.1%, contributing to an overall growth rate of 1.9% for 2022. Following dire predictions for the coming year, there has been a significant turnaround in expectations for this year.

Any talk of a long and damaging recession has disappeared as one of the two main constituents have almost entirely disappeared. The wholesale price of gas has fallen by 80% from its high last August, although the war in Ukraine is still of great concern.

There is still scope for Russia to meddle in the import of gas into Europe, but with every month that passes, the threat diminishes.

The single currency weakened last week, mostly due to dollar strength. The independent drivers that were pushing it higher have evaporated for now, leaving it a little exposed.

It fell to a low of 1.0666 and closed at 1.0679, and cloud easily challenge support at 1.0630 this week.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.