Blue and gold image with photo of Tony Redondo of Cosmos Currency Exchange promoting his latest blog post Recession, Inflation & Economic Realities

Recession, Inflation & Economic Realities: What Jamie Dimon’s Warning Means For The UK & Beyond

Jamie Dimon, chief executive of JP Morgan, said the early 2020s were shaping up to be “the most dangerous time the world has seen in decades”.

Dimon cited geopolitical tensions, extremely high government debt levels and the unknown longer-term consequences of quantitative tightening in reducing liquidity.

Dimon warned “The war in Ukraine compounded by last week’s attacks on Israel may have far-reaching impacts on energy and food markets, global trade and geopolitical relationships”.

Currency Exchange Rates Update

The Pound slipped last week to a 22-week low against the Euro. And a 32-week low against the US Dollar following a rise in both political and economic pressure on the Pound.

What’s In The News?

In The UK…

Good News

The ONS (Office for National Statistics) reported that the UK economy grew by 0.2% in August from July following a significant improvement in the services sector.

The revised second quarter figures show the UK economy has performed better than both France and Germany since the pandemic. The British economy is now 1.8% larger than before Covid. Whereas France has grown by 1.7% since 2020 and Germany just 0.2%.

Bank of England (BoE) Governor Andrew Bailey predicted a drop in the rate of inflation in the UK. Allaying recession fears having previously suggested the “last mile” would be the most difficult in the fight against inflation.

The BoE is now predicting that UK inflation is set to drop markedly for October. This despite the Office for National Statistics (ONS) recording a surprise pause last month. Inflation remaining at 6.7% in September.

The EY Item Club is forecasting the UK will avoid a recession despite the impact of the BoE’s interest rate hikes.

The ONS reported that wages outpaced inflation for the first time in nearly two years. With 7.8% growth in the three months to August.

Public sector net borrowing last month came to £14.3 billion. £1.6 billion less than in September last year. Far below the OBR’s (Office for Budget Responsibility) most recent forecast of £20.5 billion.

This can be credited to lower-than-expected debt interest payments and higher than expected tax receipts. Inheritance tax (IHT) receipts rose by £400m on last year between April and September. June saw the highest monthly total on record at £795m. Monthly business taxes surged in September with a record £14bn collected in corporation tax.

London has surged ahead of European rivals as a tech investment hub. It’s the only City on the continent to climb into the top 10 for venture capital investment globally according to a new report.

Not So Good News

Last week saw two historic by-election defeats for Rishi Sunak’s government. Labour won the Mid Bedfordshire seat for the first time in history with a swing of more than 20%. Sir Keir Starmer’s party also succeeded in taking Tamworth, the 57th safest Tory seat in the country.

Turnout in both by-elections was low. Starmer and voter apathy are not the only dangers that face the Tories. Data suggests Tory voters switching to Reform cost the party both seats. Richard Tice’s party picked up more votes than the size of Labour’s majority.

The next general election in the UK has to be held by January 2025.

According to the ICYMI, the UK has slipped from 27th to 30th (out of 38) in the annual ranking of international tax competitiveness, largely due to the big jump in the main rate of corporation tax from 19% to 25%.

UK ranks 30th overall on the 2023 International Tax Competitiveness

UK retail sales data came in far weaker than expected with sales down 1.2% on the year. Year-on-year, the value of spending was up 6%. Meaning UK consumers are spending a lot more to get significantly less for their money.  

The Resolution Foundation said between 2007 and 2023, the UK’s debt-to-GDP ratio has trebled with debt now equal to GDP. This is the largest peace-time debt rise in over 300 years.

New London Home Construction Starts have sunk to their lowest level since 2009. Amid a mixture of low developer sentiment and high borrowing costs hindering demand from would-be buyers.

Britain’s financial watchdog, the FCA fined Equifax £11m for its role in “one of the largest” cyber-security breaches in history. The FCA said that in 2017 Equifax’s parent company, Equifax Inc (EFX.N) in the US was subject to one of the biggest cybersecurity breaches in history. This was when the personal details of as many as 147.9 million US consumers were accessed during the hack. Britain’s ICO (Information Commissioner’s Office) also fined Equifax Ltd £500,000 in 2018.

Insolvencies are climbing back towards pre-pandemic levels. With a rise of 17% in the last year as companies struggle under the burden of the recent interest rate hikes.

In The USA…

Economists raised the growth projections and trimmed the recession odds to a one-year low for the US economy.

Federal Reserve Chair Jerome Powell said that while inflation in the US has receded, it’s still too high so the Fed will continue to proceed carefully with further monetary tightening given the uncertainties and risks facing the economy.

Republican congressman Jim Jordan, a close ally of Donald Trump, lost a third vote to be Speaker of the US House of Representatives, paralysing the lower chamber and raising doubts about Congress’s ability to approve more aid for Israel and Ukraine.

The largest lenders in the US have been building their loss provisions in case loans to the commercial real estate sector turn sour over the coming months as all the major banks have flagged looming difficulties in the sector.

Commercial real estate has been an area of concern in the US for the last few years with the pandemic and the rise of flexible working denting office valuations.

Capital Economics suggested that office values could fall 50% in San Francisco and Portland with Chicago and NYC not faring much better.

The long-end Treasury market has seen the highest levels of turbulence in the 30-year yield since the height of the pandemic-era panic of March 2020 with the markets focus rapidly shifting between rising geopolitical risks, a looming supply glut, concern over deficits and expectations that the Federal Reserve’s interest-rate hiking cycle will tip the economy into recession.

In The EU…

Companies in the Eurozone increased industrial production by more than expected in August.

However, the likelihood of Germany entering a second recession this year has increased in recent weeks with Europe’s largest economy set to record negative growth in the two final quarters of this year, which would drag the overall GDP growth for 2023 into negative territory.

The IMF (International Monetary Fund) singled Germany out as an underperformer and the only G7 country not expected to enjoy growth this year.

German producer prices fell at a record rate in September.

Others

The International Renewable Energy Agency has reported that renewable energy capacity around the world has more than doubled in the 10 years between 2013 and 2022.

China’s gross domestic product grew 4.9% year on year in the third quarter, beating market expectations. The economy expanded by 1.3% on a quarterly basis, regaining some momentum after growth of just 0.5% in the April-June period.

THE COSMOS OFFER

Of course, currency market volatility can bring trouble but with careful monitoring can also bring opportunity.

At Cosmos, we provide our clients with a relationship not a transaction-based service.

We are pro-active not reactive.

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Quote

This week’s quote is from Ray Dalio

‘Don’t let fears of what others think of you stand in your way’.

Ray Dalio is an American billionaire investor and hedge fund manager, who founded Bridgewater Associates in 1975 and has served as co-chief investment officer of the world’s largest hedge fund since 1985.

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