Are We Heading for a Recession?

Last week I was taking a break on the island of Malta.

It really is a beautiful place. Full of history and culture of all sorts and from all ages, Malta has some great restaurants too and a wonderful array of beaches. On this island you are never far from the beach no matter which way you turn.

On Malta it is sunny vistas all day, every day.

While enjoying a morning cappuccino thinking that all was well with the world my eyes strayed to a weekend edition of the Financial Times. It was the headline that arrested my attention straight away: ‘Sterling has finally buckled.’

Almost spilling my morning coffee, I read on of the reports that JP Morgan had forecast that a no-deal Brexit exchange rate for Pound Sterling would mean it trading at US$1.15, with a possible further 10 per cent fall beyond that. This compares with the pound trading at US$1.50 before the 2016 Brexit referendum.

The new British Prime Minister, Boris Johnson, looks intent on facing down the European Union. All the talk is of no deal. Such talk has made that likelihood more likely. Such talk has also unsettled the markets right across Europe and beyond. Thus the gloomy forecast from JP Morgan and others. The British pound has not seen such a fall against the US Dollar since the bad old days of inflation and industrial unrest in the 1970s.

Some argue, however, that this is what the United Kingdom is going to need post- Brexit: deal or no deal. They argue this position believing that a radically devalued pound is the key to future UK prosperity. They also argue that it will release UK export manufacturers from the shackles of the EU regulatory straight jacket as the newly freed UK makes deals as it sees fit and as competitively as it likes on the global stage. A booming export drive fueled by a devalued pound sterling will then wipe out Britain’s longstanding trade deficit.

So far so good, but going back to the 1970s the economic scourge of that time was inflation and the program as proposed above has that real possibility. Also, it may not be a case of the UK making fresh deals as it goes about the world no longer encumbered with being part of the EU as a UK alone in the world, free to wander it but making it up as it goes along.

This last image in particular does not inspire confidence. Business people are not fooled by the upbeat talk of the new UK administration with Boris Johnson at the helm. What they and others need to see are real plans and economic forecasts that bear some resemblance to what we have come to expect from a government that is governing as opposed to reacting to circumstances. Anything else is no way to run a business never mind a country.

And there remain some real questions about a Brexit no deal scenario.

What if the Bank of England decides to cut rates and even fall back once more on to some form of quantitative easing. Both measures spell inflation for the UK, so does this mean the Bank will raise interest rates to stop inflationary pressures in the economy? Remember this is a UK economy that has had next to no rate increases for almost a decade. How will that affect mortgages and other household bills? And is this politically possible – read for that ‘desirable’ – with an imminent UK election being talked about?

And, yet, unless these questions are answered there is a real possibility of chaos ensuing after a no deal Brexit.

And suppose exporters’ no deal Brexit dream turns into a bureaucratic nightmare of form filling and custom regulations. In short that could mean British exports sitting at docks or airports with nothing being shifted abroad never mind anything selling and businesses getting hold of what will be much needed foreign exchange.

Downing Street’s high-risk brinkmanship is, I hope, part of the political noises to get a deal with the EU. I really do. But I’m afraid that any deal that Boris Johnson will manage to get in the few weeks remaining will not be as good as the deal the UK has currently with access to a market of over 500 million.  Yes, it’s possible the UK will come out the other side of all this a richer, happier and much admired country, secure in its place in the world. It may happen. I hope it happens. I am also hoping that Sterling will recover once any deal is signed, sealed and delivered. From a sun drenched square in Malta it looks like a gamble, with Prime Minister Johnson the biggest gambler of them all.

You see it is not just Bexit that the UK should be concerned with. It is not even a no deal Brexit that is the greatest threat to the country.

It may come as a surprise to learn that the UK economy is already contracting.  In the second quarter of this year it began to contract by 0.2 per cent. Now it is something that has been pointed out ad nauseam by Brexiteers that the UK economy despite the “gloomsters and doomsters” the dire predictions post the 2016 Referendum that the British economy was about to tank proved way off the mark. The UK has seen an incredible growth spurt and with an allied growth in jobs, which incidentally rose again in April to June despite this latest setback.

The thing is that all of that could be ending just as the country enters into the greatest constitutional crisis the UK has known since the Second World War.

This possible economic tsunami about to hit is not a UK problem. If it hits all Europe – EU and non-EU – will be affected, to say nothing of China and India.

The signs are already there. Take, for example, the International Energy Agency report that global oil demand is now growing at its slowest rate since the 2008 crisis, with only China bucking the trend demanding more fuel. As a result the oil barrel price has drifted from $75 in May to the summer price below $60. There are also the approximate 30,000 job losses in the investment-banking sector since April.  What this tells us is that the business of international deal making at a corporate level is in decline – seriously so. In addition, key government bond yields on both sides of the Atlantic have been on the slide recently. Add in to all of this the recent spike in the price of gold from $1,270 per ounce in May to around $1,500 today, which says one thing only that investors are running for cover with fears of a coming storm and heading to the safe havens of gold. The central banks of Russia and China are leading the charge in this regard – 374 tonnes in the first half of this year, making it their biggest buying spree for two decades.

What is coming is going to be a game for those with strong nerves.

For me this all starts to spell one word: recession.