The UK is still facing a “more dire” economic situation than the US and Europe, according to a market analyst.
Hopes for the UK economy may have been buoyed by figures showing that the UK economy grew 0.1% year-on-year in November, but OANDA Senior Market Analyst Craig Erlam is unconvinced.
He said in an interview with the Financial Services Forum earlier this week that while in the US the debate is over whether the country will fall into recession, in the UK the debate has been more about “how long and how deep” it will be.
“The warnings coming from the central bank, the IMF and other institutions has been much more downbeat than we’ve seen elsewhere.”
He notes that it’s possible to “get a bit carried away with the ‘R’ word” and that the difference between 0.1% of growth and 0.1% of contraction can be overstated.
“That’s the problem in the UK – it’s not just the consequences of the pandemic, and the energy price shock – we’re also dealing with the Brexit transition.”
He says that while it’s important not to always blame Brexit for the country’s ills, the withdrawal from the EU is compounding the other major challenges.
Other markets may be in better positions, Craig says. This particularly applies to the US, which has a large savings buffer, longer term mortgages, and is in a stronger position more broadly including having a stronger dollar.
In terms of consumer sentiment, he believes the rising prices have been a “shock to the system”, following a measure of “warning fatigue” after years of dire warnings from economic experts that may or may not have come true.
“But once you start to live the reality, then it’s going to impact your behaviour, I think much more.
“And I think the first and second quarter of this year could be quite a shock to the system. Ultimately spending is a massive component of UK GDP – services account for around two thirds of UK GDP, and I think household spending is about half of that. So it’s going to take a significant toll.”
He points out that the first step for consumers to rein in discretionary sending, then essentials such as heating, but this may eventually impact the likes of pensions. In fact, figures from the Pensions Management Institute suggest that as many as 40% of people may reduce or opt out of pension contributions over two years due to the cost of living crisis.
Equity markets are showing a broader pullback, he notes. The last 10 to 15 years have seen markets with enormous liquidity, fostering a “buy the dip” mentality which is a hard thing to shrug off. Now in particular, technology stocks have been hammered as people look for stocks with predictable and stable returns.
Craig notes that cryptocurrencies have faced their first major test – this has been a “shocking 12 months for them and a big learning cure for that industry.”
As for the core drivers of inflation, Craig expects energy markets to remain volatile this year. In particular, there may be less output from Russia while China may decrease its demand for oil in the first half of the year before increasing it again later.
