20 February 2024: The economy may exit recession as quickly as it entered

20 February 2024: The economy may exit recession as quickly as it entered


  • Ex-MPC member calls for rates to be slashed
  • Consumer Confidence is still resilient, but so does CPI and PPI
  • Schnabel calls for a productivity boost to drive inflation lower
GBP – Market Commentary

Sunak is confident that “the plan” is working

The former Chief Economist of the Bank of England, Andrew Haldane, provided a stark warning yesterday of the consequences if the Bank doesn’t lower interest rates soon.

Haldane who left his role in June 2021, when the base rate of interest was 0.10% warned that the recession could be made “immeasurably worse” and “crush” the economy.

Ironically, Haldane was an advocate for higher interest rates during his time as Chief Economist. He was succeeded by Huw Pill, who hasn’t always been popular with the City of London owing to his often blunt appraisals of the economy.

Haldane went on to say that, in his opinion, the balance of risks points to a further contraction rather than a surge in inflation. The MPC is still concerned about the tightness of the labour market and rising prices in the services sector, as well as geopolitical threats to supply chains.

The independent members of the MPC each have considerably different views than the permanent colleagues.

The Prime Minister repeated his claim that the economy has turned a significant corner since the start of the year, although he was careful not to say that he felt that the recession had already ended.

Data published since the New Year hasn’t pointed to an economy that is in recession, although there has been no indication that growth has returned to any substantial degree.

Sunak is struggling to create a feel-good factor around his government, but his efforts continue to be thwarted.

The Spring Budget is due to be delivered in a few weeks, and it will likely be left to Jeremy Hunt to deliver the tax cuts that Conservative Party Members and their MPs have been craving.

There are rumours that the basic rate of income tax will be cut by two pence in the pound, while Corporation Tax may also be cut.

The Labour Party has been concerned about the cuts to public services that have been taking place almost since the Conservative Party came to power almost fourteen years ago. NHS waiting lists will be a major of the election manifesto talking points, although Labour will need to add some detail to their undertakings if they are to maintain the support that led to two stunning by-election victories last week.

The pound is still becalmed, with the market only driven currently by the prospect of interest rate cuts. Sterling fell to a low of 1.2583 yesterday but recovered to close at 1.2598.

USD – Market Commentary

The fiscal deficit is expected to rise from 5.6% of GDP to 6.1%

Supporters of Donald Trump in Congress are mischief-making by delaying the passage of a bill that would release significant funds to support Ukraine in its war with Russia. Trump is engaged in a war of words with NATO over the European nation’s contributions to its budget.

The prospective Republican Party nominee to fight the Presidential Election has made some radical and inflammatory remarks recently, which have not endeared him to European leaders and provided a taste of what may be expected should he win in November.

The Congressional Budget and Economic Forecast was published recently, and it showed that the fiscal deficit will continue to rise over the next ten years despite the current low level of unemployment, which should bolster the Treasury’s coffers through increased tax receipts and lower-than-average benefits.

The U.S. debt to GDP ratio was at 31.5% at the turn of the century, about a third of what it is today. This is what has been concerning Jerome Powell recently, despite Treasury Secretary Janet Yellen’s belief that the level of debt is “sustainable”.

Several Republican members of Congress are warning that the country is leaving itself open to a covert attack on its economy by expecting countries that don’t share the country’s politics to continue to fund it by buying Government paper.

The level of debt will also threaten America’s AAA rating.

The minutes of the latest FOMC meeting will be published tomorrow evening, but just as the meeting itself failed to shed any light on when rate cuts will begin, the market doesn’t expect the minutes to provide any revelations.

FOMC members have been speaking recently about their views on when rate cuts should take place, and there is no reason to think anything has changed over the past three weeks.

Overall, the financial market is not expecting a cut to be announced at the next meeting, which concludes on March 20th, with commentators split between May 1st and June 12th for the first cut to take place.

The dollar index retains strong support around the 104 level but is struggling to make any progress higher. Yesterday, the market was subdued due to the President’s Day holiday. The index trader in a 104.27/104.14 range, closing marginally lower on the day at 104.26

EUR – Market Commentary

It’s not just about interest rates

The German economy is facing several headwinds in its efforts to avoid a major recession, technical or otherwise, according to its Finance Minister.

Weak export orders and consumers who are still cautious about inflation and the prohibitive cost of borrowing are the most significant contributors to the country’s current malaise.

Likely, the country has already entered a technical recession, and the data that has been released recently has been anything other than encouraging.

The country is still coming to terms with the fallout from the Russian invasion of Ukraine, as its vast heavy industrial sector deals with higher energy costs and weak demand both domestically and overseas.

The Bundesbank issued its quarterly report yesterday., and it questioned the sustainability of the German economic model.

The current model relies on energy-thirsty heavy industry, while other nations both within the Eurozone and outside have developed service sectors which are more in tune with current developments.

There was no suggestion that the country should consider leaving the European Union, although the political right is pushing for the country to hold a referendum.

They believe that the Eurozone has stood on Germany’s shoulders for long enough, and now when the country needs help, Eurozone members are concentrating on their issues.

The Bundesbank insists that the current weakness will persist for at least the first half of this year. The Government has pushed back against this gloomy suggestion, saying that the perfect storm of weak Chinese demand, high energy costs and high inflation is temporarily holding back growth.

The Bundesbank rarely “washes its dirty washing in public” and its comments are synonymous with the perceived weakness of the Scholz Administration.

Since he succeeded Angela Merkel, Olaf Scholz has struggled to come close to equalling her popularity, although he can point to possibly being a “victim of circumstances”.

The Euro is repeatedly challenging the top of its recent range but is running into selling pressure every time it comes close to the 1.0790 level.

Yesterday, it reached a high of 1.0789 but fell back to close at 1.0779. It appears that there are significant institutional sell orders around the 1.08 level and traders are front-running those orders, using them as protection.

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.