Steven Bell: A recession is absolutely necessary

According to Steven Bell, chief economist at Columbia Threadneedle, the outlook for the US and Europe is not rosy. But he is only really worried about Great Britain, he writes in his weekly commentary.

Federal Reserve Chairman Jerome Powell showed in Jackson Hole last week his willingness to continue raising interest rates until inflation is under control. And it was not what the markets expected, says Bell. “Markets expected a turnaround from the Fed beginning early next year, which should see interest rates fall significantly through the rest of 2023. Now, one can only expect a faster tightening followed by a modest decline. In addition, the Fed admits that unemployment must rise to curb inflation. So I think a recession is absolutely necessary.”

“I think a recession is absolutely necessary.”

gas prices

Inflation is high and rising in Europe, but food and energy prices are the main drivers here, Bell notes. “When Russia cuts supplies, gas prices are 20 times higher, that’s 2,000%! These rising energy prices are undoubtedly throwing Europe into recession. Yes, interest rates will have to rise here, but the local causes of inflation – wages and rents – are not nearly as significant here as they are in the US. All bad news for risky investments such as stocks.”

The outlook for Britain is even more worrying, Bell said. The country has been in debt for decades, which Bell says can no longer be sustained. A weaker currency is now a real possibility, he said. “If, as expected, Liz Truss becomes the new Prime Minister and responds to the crisis with reckless tax cuts, deficits will continue to rise. Then inflation will increase further, households can no longer pay their energy bills, and we will again end up in a political crisis. Kwasi Kwarteng is likely to become Chancellor of the Exchequer and he shares this distrust of the Treasury and the Bank of England (BoE). He will have to stand his ground to convince the new Prime Minister to renege on her campaign promises so quickly.”

Truss’ plans to tinker with the BoE’s mandate are also worrying financial markets, Bell said. “Truss’ plan to freeze energy prices through a government-backed fund is a high-risk strategy,” Bell says. bonds, lower welfare benefits and higher personal income. It could even prevent a recession. But the plan involves an “open subsidy” based on a sharp drop in gas prices. In short, it may be a high-return strategy, but it also involves high risk .”

Worrying outlook

Bell sees a very worrying outlook 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 for future bank interest rates rose sharply. This would normally attract capital inflows and strengthen the British pound, but the currency did not recover. According to several analysts, we see such a reaction more often in emerging markets – one bank analyst went so far as to characterize the UK as a banana republic. It is exaggerated. But with the current account deficit heading towards 5% of GDP and gas prices soaring, there is a real risk of the pound falling against the mighty 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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