I don’t think I can remember a time when there were such divergent views on where the UK and the global economy are heading, so I thought it would be useful to summarise and consider the different opinions.
The Expansionists – this group think that central banks will be forced to pivot away from interest rate rises sooner than expected and reduce them faster than expected. In short, they believe central banks will stop caring about inflation and instead move towards credit expansion to grow the economy. This group tend to be proponents of the next bull market in equities. While central banks have softened their language and given more mixed messages recently, the reality is that they are still raising rates and I don’t see that any of them will suddenly pivot away from wanting to bring inflation down any time soon, or at least until there is significant evidence inflation really is heading back to below 2%
The Shallow Recessionists – Central banks are mostly towing this line now, that inflation will steadily come back down over the next 12-18 months, during which time there will be some contraction due to the cost of living crisis, a weakening of the labour market, living standards will fall, and at best there might be anaemic growth. These proponents hinge their argument on the fact that inflation will fall back without any significant further tightening in credit due to the energy and global supply shocks of the last couple of years working their way out of the system.
The Stagflationists – unlike the above, these believe that inflation has been driven by government borrowing and loose monetary policy rather than supply shocks, and believe that unless there is further fiscal and monetary tightening (reduced government spending and borrowing and higher interest rates) then inflation will remain sticky. This group think that while inflation may drop back it won’t drop back significantly and may rise again forcing further intervention and a more prolonged downturn until inflation is genuinely under control.
The Global Recessionists – this group believe that the global economy is already heading for a deeper recession and believe that what we are seeing so far is just the first cracks appearing. The economy is being supported by high savings rates which are a hangover from people not spending during COVID and point to the recent banking issues and growing technology job losses in the US as the forerunner to a global demand slump.
The Deflationists – there is a small group who probably take the above one step further and believe that the current inflation could quickly turn to deflation if we hit a tipping point where consumer demand and business investment drops off a cliff.
The De-Globalisation/ Demographic Crisis Argument – along slightly different lines there is a growing group who believe we are entering a significant period of deglobalisation and demographic crisis that is going to dramatically re-shape the global economy, This probably warrants a deeper analysis another time.
Personally, I probably sit mostly in the stagflation group, an awful lot has to go right for central bank predictions of inflation falling back to 2% of its own accord for it to become fact. I think there are still risks to energy and food prices, we’ve had a very mild winter and reasonable growing season in most parts of the world.
Overall, I would probably make the following assessment:
Expansion – 10% chance
Shallow recession – 25% chance
Stagflation – 35% chance
Global recession – 25% chance
Deflation – 5% chance
However, rather than pick what you think is going to happen or try to predict an exact course, it is always best to take a risk-based approach and consider what the risks and opportunities are to your organisation or business under various scenarios and make decisions accordingly.