J.P. Morgan(JPM) economists said on Friday that chances of Britain going into a recession over the next couple of years have increased amid soaring inflation due to the country’s vulnerability to external shocks. Morgan’s statement came a day after the Bank of England(BoE) raised borrowing costs.
Recession and inflation
In an economy, while recession is said to be a period of slowing down of the economy indicated by negative growth, inflation means the increasing prices of goods and services. Also, recession is a temporary phase and inflation can be a prolonged phase depending on the kind of inflation rate.
Factors that economists take into account to decide the probability of a recession in modern economies include financial factors like government debt and GDP as key role players. The more the financial stability in an economy, more is its stability factor. There are other factors like consumer demand, employment rate and so on, but they are also dependent on finance stability factor. In Britain’s case, financial stability is declining due to rising debt and weak consumer demand leading to rapid increase in prices. Hence chances of recession have increased in their economy over the next couple of years.
J.P Morgan’s statement on the issue
On Thursday, the BoE raised its benchmark interest rate to 1.25%. The new rate was the highest since January 2009. Though its move was more gradual than other central banks, the BoE said it was ready to act “forcefully” if needed to tackle dangers from inflation.
In 2009, Britain suffered its first recession since 1991 during the global financial crisis, shrinking by 0.5% from the previous year’s Q4.
Quoting to JPM as saying, Reuters writes, “If the (U.S. Federal Reserve) engineers a sharp growth slowdown or recession, this would spill over to the UK and, combined with a tightening in domestic financial conditions, likely produce a UK recession”.
On Thursday, the Fed rolled out its biggest rate hike since 1994 and flagged a slowing economy. In 1994, the Fed started its rate hike cycle. The discount window is part of the Fed’s toolkit to help finance the economy and encourage growth.
“… given the nature of the UK economy, we see high vulnerability to external shocks beyond the near term and see increasing chances of a recession over the next one to two years,” JPM added.
In addition, it also said that recession would be more likely if British rates topped its long-term forecast of 3%.
Now, countries worldwide are battling cost-of-living levels not seen in decades, ratcheted up by the reopening of the global economy after the COVID-19 pandemic and then by the Russia-Ukraine war. The BoE expects inflation to top 11% in October.
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But, JPM predicts that British banks to remain profitable and mortgage defaults to remain below previous recession peaks even with higher interest rates. JPM also added that it expected the initial impact on borrowers would be manageable over the next 12 months.
The British government earlier in this June said it would launch a comprehensive review of the mortgage market, months after a BoE survey showed lenders expected loan defaults to rise.
Final lines,
The predicted recession in Britain’s economy is deemed as a bad news for its neighbors. In the coming days, as economists say, there are chances that most of the economies in Europe will also suffer from recession unless there is some surprise recovery in their economies. In addition, sustained higher interest rates would also deteriorate London as financial hub for offshore operations of many foreign companies as well.
