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A global recession is not our baseline. But we acknowledge that several countries are likely to enter into technical recession this year. We are very pessimistic about the United Kingdom’s outlook, especially. All the statistics released last week tend to indicate the economy will experience negative growth this quarter : the GfK consumer confidence fell below all-time low, at minus 40 in April, due to the surge in cost of living, retail sales look stagnant in the medium-term despite the short-term April rebound (+1.4 % MoM in volumes) and the April CPI jumped by two percentage points in just a month, from 7 % YoY in March to 9 % in April. Expect it to climb above 10 % in the coming months. Add to that the effect of the extra bank holiday which is likely to reduce activity this quarter. The pool of savings accumulated through the Covid crisis remains abundant. But it is mostly concentrated among higher-income households. Therefore, it is very unlikely to help much with consumption.
All the major leading indicators of the UK economy confirms the worst is yet to come. The UK OECD leading indicator, which is designated to anticipate turning points in the economy six to nine months ahead, fell in April at 100. The year-on-year rate was at 10.4 % in April 2021 ; it now stands at minus 0.4 %. This is quite a swing over a one-year period. In addition, new car registrations, which are often viewed as a leading indicator of the wider UK economy, are in free fall driven by a massive drop in consumer confidence – see below chart. In June 2021 (post-Covid peak), new car registrations were at 1.88mn. It is now at 1.61mn – a stunning drop of 11 %.
We think that at least two major developed economies are on the brink of a technical recession this year : the United Kingdom and France (which experienced stagnant growth in Q1 driven by a worrying drop in domestic demand). Australia is also a reason for worry, in our view. The Reserve Bank of Australia is tightening aggressively in a global inflation surge and business cycle that is already very long in the tooth. A policy error can easily happen, in this context. A larger number of developed economies are going through some form of stagflation (this is the case of Germany, for instance). In the United States, domestic demand remains solid (April retail sales and April industrial production figures were encouraging despite the surge in prices). A soft landing will be a complicated task for the U.S. Federal Reserve. But this is still possible. As a warning, we may adjust our forecast for global growth in the coming months if the contraction in new export orders in Germany and China (the two main global exports) last. This would give more credibility to markets’ call of global recession. This is too early to say, however.