2023 will be an interesting year as it precedes 2024. Although that sounds obvious, 2024 will see a new European Parliament and Commission and, in all likelihood, a general election in the UK (not to mention a Presidential election in the US). In Brussels, there will be a focus on getting the programme of the current Commission finalised as far as possible and, in the UK, the current Government will be pushing to demonstrate it should be given an extended mandate.

Pressure will be building on policymakers to act, and this will need close attention. Companies should be ready to act to influence the process, whether directly or indirectly (for example through the media).

David Cook, Partner at Penta, sets out the drivers for those of us watching closely where the EU and UK are going.

Competitiveness

Despite some thawing in relations in 2022, the shadow of Brexit continues to loom over both the UK and EU and competitiveness between jurisdictions has become a key concern. In the UK, the Financial Services and Markets Bill will provide regulators with a secondary objective to consider the UK’s competitiveness. The UK government has also set out its strategy for regulation in the form of the Edinburgh reforms. These focus mainly on reform to parts of the UK system that have proven unpopular and have been badged as using Brexit freedoms. Ironically, some of the highest profile reforms are in areas, like ringfencing and the senior managers’ regime, that were not actually related to EU law.

In the EU regulation aims to provide the single market with ‘open strategic autonomy’. This nebulous label intends to boost the efficiency of the single market and the competitiveness of EU firms while not relying on ‘third countries’ such as the UK.  The EU is looking to make tangible progress on its Capital Markets Union agenda, and tech and data will be important features in the regulatory work of the EU in 2023.

A regulatory focus on competitiveness might sound attractive, but memories remain of the financial crisis, before which competitiveness was a regulatory objective, so there may be reluctance to embrace it. Also, regulators do not have a great record of promoting innovation and data-driven change in Europe, so a close eye will need to be kept on this.

Crypto

2022 has been dubbed the crypto winter with huge falls in the value of cryptocurrencies and some high-profile failures in the sector, including FTX and Terra. This has led to a dilemma for policymakers in Europe. The focus on competitiveness means some want to welcome this innovative technology that many people continue to believe has an exciting future. However, the risk to investors, financial stability and even the ability to police and control the supply of money is causing sleepless nights in some institutions.

The EU is, as usual, ahead of the international game when it comes to producing regulation. Its flagship regulation, MICA, is agreed and ready to pass into law (although it will be some time before it needs to be adhered to). The EU has also advanced its work on digital currencies and the ECB is currently pulling together a group on rulebook development.

Similarly, the UK is preparing consultations on crypto asset regulation and digital currency. Except for new powers around financial promotions, new regulation is not expected in 2023. However, the direction will be set in 2023.

Whether the UK and EU adopt similar approaches remains to be seen. A competitive environment could emerge where each jurisdiction seeks to be at the forefront around, for example, blockchain adoption or central bank digital currency. This might introduce risks around intended consequences, where regulatory approaches are not properly analysed in a rush to move forward. Equally, there could be excessive caution that limits the development of the sector in Europe. It will also be interesting to see how the UK and EU overcome the dichotomy of regulators, who will be very concerned about the risks, versus those who want an environment focused on innovation.

Sustainability and productive finance

In an environment where public finances are suffering from severe stress, governments have been focussed on how private sector finance can be used for public policy purposes and how investors can be sure their money is used for such purposes. This is most apparently seen in the regulation around climate change where the EU’s impressive array of rules, including the Taxonomy and disclosure requirements, are becoming a huge compliance challenge for many firms operating in the EU. The UK is pursuing its own agenda and there’s an ambitious approach being developed where the divergence from EU rules is creating its own challenge.

There are also plans to consider how changes in regulation can increase sustainable investment and, in the UK, other policy objectives such as levelling up and promoting innovation. Last year saw the candidates to become UK Prime Minister talking in public debates about how changes to regulation such as Solvency II could be used to promote more of this type of investment in the UK.

Changing regulation in the EU and UK will create risks, burdens and opportunities for the firms that fall into scope. New disclosure requirements are likely to be hard to meet but changing investment rules could play to particular businesses’ strengths. Firms should ensure policymakers understand what’s practical and effective.

Energy

The events of 2022 mean that energy security and cost are a top priority in Europe and politicians have been quick to act to support markets and consumers. When it comes to financial services, there are three main concerns. First, can investment be increased to help reduce the reliance on fossil fuels generally, and Russian gas specifically? Second, have markets delivered efficiently for European consumers. Third, could energy market turbulence lead to turbulence on financial markets, as seen in markets such as the London Metal Exchange.

Of these three, the first concern has increased the urgency around creating a regulatory framework to increase investment in non-fossil fuels (as described above). For the second point, appetite for direct intervention by authorities in markets has been rising, particularly in the EU. This is very uncomfortable for those firms active in energy markets where price caps and public sector produced financial instruments (like price benchmarks) are likely to distort markets and could undermine confidence if not properly calibrated. Policymakers, lacking specific expertise, are going to need a great deal of assistance.

Finally, the third point about risk moving from energy markets to financial markets is likely to be challenging, particularly for those firms who prefer to avoid operating under the burden of financial regulation. Without proper calibration, new measures are likely to raise the costs of operating on energy markets and lead, ironically, to higher energy costs.

Financial Crime

Finally, a focus for regulators will be around how to reduce the levels of financial crime and keep investors safe. The losses to investors caused by the collapse of crypto-currency prices have been part of the story, but there have been a number of misselling scandals that have embarrassed regulators and shaken confidence in investing. In the UK we can expect to see the FCA act to strengthen the approach it is taking to protect consumers. We should also see regulation that helps reduce scams by increasing the requirements on banks and social media providers.

In the EU there is a package of measures around anti-money laundering under development to ensure a more harmonised approach across the single marker and also create a new EU-wide regulator to enhance supervision. This is likely to mean increased compliance and due diligence costs for those brought into scope.

Employers added 223,000 new positions last month, pushing the jobless rate down from 3.6% in November to 3.5%, sparking hopes that the largest economy in the world will avoid a drastic economic downturn.

It has held this position since the 1890s, buoyed by technological, financial, and manufacturing technologies. In recent years, China has modernized and transformed into the fastest-growing economy. Today, the Chinese economy is second only to the US in size. The top two economies control 41.89% of global GDP.

What is GDP and why do we use it as a measure of economic success? GDP is a measure of the goods and services produced in a county during a specific period, usually a year. In a growing economy, the volume of goods and services grows. As the economy slows, the number of goods and services will also slow down or even contract.

Is the US Heading for a Recession in 2023?

GDP in the US has grown steadily since the financial crisis of 2009. It quickly rallied from the pandemic recession because of the vast and lasting government response. 2021 brought growth and prosperity. The country was hit by hard-hitting inflation, the highest since the 1980s.

The Conference Board of Forecasts expects economic difficulties in the US to expand in the wake of persistent inflation and the Federal Reserve’s aggressive fightback. The bank increased interest rates several times during 2022 by an accumulated 4.25%. The Board’s expectation for 2023 is a recession and a zero increase in GDP for the year. The forecast is for a short relatively mild recession with a rebound toward the end of the year.

When Will Inflation Drop?

Interest rate increases have affected the housing market, as mortgage repayments escalate. The rampant dollar will negatively affect US corporate profit margins. The inflation rate is likely to soften from the 2022 projection of 7.7% to a much lower 3.4%. Lower housing prices, high inventories, and decreasing demand will all help to moderate inflation.

Slowing inflation will allow the Federal Reserve to curb interest rate increases. The bank has signaled its intention to continue raising interest, at least in the first quarter of 2023. Thereafter, it is likely to hold interest rates and start to reduce rates in 2024.

US Economic Outcomes 2023 and Beyond

Employment growth in the US in 2022 has been nothing short of remarkable. November’s unemployment rate was 3.7%, so organizations battle to find the skills they need. Large layoffs in 2023 are unlikely because companies will want to retain the skills. Still, Morgan Stanley predicts that 2023 will end with a slightly higher unemployment rate of 4.3%.

The ageing population could present the US with one of the biggest financial headaches of the future. In an economy already at full employment, a declining workforce will lower productivity, and cause increased wages and inflation. Future government policies must center around expanding the tax base and building healthcare infrastructure for elderly care.

The outlook for 2023 is far from certain. The war in Ukraine, ongoing gas shortages, supply chain shocks, and the increased cost of energy will continue to weigh on prices and growth.

China’s recent pivot on its zero Covid-19 policy should increase global trade as the borders open and trade increases. The Chinese people are not as well-inoculated as the western world. An exposed population may succumb to severe illness. This could force a return to economic lockdown in China with knock-on effects on the global economy. 

What about the long-term future? Will the US retain its current position as the world’s biggest economy? Global consultants PricewaterhouseCoopers, in their 2017 report called “The Globe in 2050” predict that India and China would overtake the US as the world's largest economies. The report forecasts a world economy that doubles between 2016 and 2042. Emerging markets like Brazil, China, India, and Indonesia will drive this growth.

It's pointed out that the rise in rates has been done by central banks "with a degree of synchronicity not seen over the past five decades" to tackle soaring prices,

The trick is not to be distracted by the noise and avoid drawing all the wrong conclusions. So, I try not to scream when the market seems blithely unaware of the cataclysm of bad news threatening to overwhelm it.

More often than ever before I find myself wondering if markets have some form of dementia. Stocks suddenly rise a couple of percent when the news sounds unremittingly bad, solely on the basis that tomorrow will likely be better, or that really, really bad news will force Central Banks to give up on monetary tightening – thus making bad news into good news.

Market sentiment is up and down like a see-saw. When senior bankers, like Jamie Dimon of JP Morgan, are telling their banks' largest clients they see a greater than 20% likelihood of something worse than a hard recession – then maybe it’s time to check your hard hat is a snug fit.

For the last few months, the tone of markets has become more and more confusing. Whether the driver of uncertainty is China, Russia, inflation, war, Ukraine, energy or simple political or central banking ineptitude – the up and down of prices feels like it is making less and less sense by the day. The thing is – these are all known unknowns, things we are aware of, and have worked out how they will hurt us.

As a humble market strategist, I continue to pick the information together to discern probable outcomes. Whether it is raw data, reading through behaviours or seeing patterns in events, there is plenty of information out there – often too much. I try to interpret it and use it to discern what markets might be doing. (The key is to understand markets don’t think – they are just a voting machine.)

But the thing that really knocks-out markets are the no-see-ums – like the pandemic or the energy spike that has routed European economies.

Recently, I was looking at Risk On/Risk Off scenarios and came to the conclusion that US Treasuries will remain the core risk mitigation strategy. What could possibly undermine the mighty dollar?

Chips have become a key strategic resource. No one wants a destructive, costly war over Taiwan, or to wreck the global chip supply.

But then I also figured out the role of the humble computer chip in the global economic picture. Such a small thing could trigger a geopolitical crisis.

Perversely, the global chip business seems to be in short-term trouble. Investors are focused on declining demand for chips as post-pandemic shortages ease, and the rapidly escalating costs of new chip foundries required to make new ones threaten to overwhelm the market. Even as some of the major manufacturers have seen their stock price tumble, global demand for chips is set to double in the next decade – hence the need for greater investment.

On the other hand, semi-conductors (to give chips their proper name) are about the most important component of the global economy. Without chips… nothing works. We would go back to the horse and cart. The imperative from Washington to Beijing is to secure their access to chips.

Chips have become a critical strategic good – and that means they have become a key issue in the geopolitical Game of Thrones being played in the South China Seas.

Here are some points relating to semi-conductors to think about. Chips are ubiquitous:

• The US has just approved a $53 billion bill to boost semi-conductor R&D – President Biden promises it will cut costs and create jobs.
• China has just revealed a state investigation into how money has been siphoned off from a $100 billion state effort to build and upgrade its semi-conductor sector as part of its $3 trillion plan to move China into the top league of global tech.
• Chinese chips are still a generation behind.
• It takes 3-4 years to build a new chip foundry – there are critical machines to source and install.
• It takes far longer to acquire the expertise to run it and produce top-end designs.
• Taiwan produces over 65% of the global chip supply. It has a monopoly on producing the most complex chips.
• Both the US and China are heavily reliant on Taiwan-manufactured chips.
• Nancy Pelosi’s most important meeting last month wasn’t with the Taiwan president, but with the mighty Taiwan Semi-Conductor Manufacturing Company (TSMC) – trying to persuade them to expedite the establishment of US production sites.
• Sophisticated modern weapons rely on chips. US and NATO stockpiles are being run down to supply Ukraine. China stockpiles remain intact. Raytheon recently reopened the Stinger production line – but could take years to deliver 1200 new missiles to an old design.
• Wargames modelling a Taiwan invasion and US intervention suggest a war could cost the US Navy and Air Force over 900 aircraft (half the US inventory) and the bulk of the Pacific Fleet. The Chinese would not win and would see their amphibious forces destroyed.

Chips have become a key strategic resource. No one wants a destructive, costly war over Taiwan, or to wreck the global chip supply. The Chinese have enough on their economic plate – property fallout, the domestic loan market, youth unemployment, plus the ongoing damage of COVID restrictions to contend with. The conflict would simply exacerbate their economic weakness ahead of critical party meetings.

But… If China wanted to inflict economic self-harm by inviting Western Sanctions and lost manufacturing orders, then they could.

The Chinese don’t actually need to invade to thoroughly destabilise the West. All they would need to do is institute a blockade of Taiwan. The West would not be certain of global support against such a move. If the Chinese frame it as domestic police action, the same countries that failed to rally against Russia’s invasion of Ukraine – critically the Gulf States – may decide to withhold support and wait and see how it plays out.

A global shortage of chips will swiftly impact the West’s manufacturing capabilities, closing down the auto sector and causing chip rationing towards defence spending. It would be dangerous – a blockade would raise the likelihood of mistakes, miscalculations and raise the risk of confrontation turning a cold war hot.

Sprinkle in some more confusion – like a new Trump administration likely to unravel the Western Democratic Alliance and break NATO. Trump had his successes, but his first presidency was an unmitigated disaster in terms of America’s international standing and relationships. He offended US allies and diminished the reputation of the Bastion of Democracy as a reliable partner. Should Trump’s new MAGA republicans win the mid-terms it will further change the signals – perhaps encouraging China to take a risk on Taiwan’s chips…

Official figures by the Office for National Statistics (ONS) show that GDP dropped 0.1% during the three months to the end of June, a significant step down from the first quarter of the year when GDP increased by 0.8%. In June, GDP was down 0.6%. 

The ONS reported that the country’s service sector was hit particularly hard, falling 0.4% over the quarter. 

In a comment, ONS director of economic statistics Darren Morgan said, “With May’s growth revised down a little and June showing a notable fall, overall the economy shrank slightly in the second quarter.”

“Health was the biggest reason the economy contracted as both the test and trace and vaccine programmes were wound down, while many retailers also had a tough quarter.

“These were partially offset by growth in hotels, bars, hairdressers and outdoor events across the quarter, partly as a result of people celebrating the Platinum Jubilee.”

The Bank of England has warned that the UK may enter into a recession later in 2022 and believes this could be the longest economic downturn since the financial crisis of 2008.

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The news comes not long after the Federal Reserve upped interest rates by three-quarters of a percentage point to a range of 2.25%-2.50% in a bid to curb growth and ease price pressures.

Despite the report, Federal Reserve Chair Jerome Powell thus far maintains the view that an economy that is adding hundreds of thousands of jobs per month is not experiencing a recession. Over the past months, Powell has vowed to take action against record-high inflation. 

"We do want to see demand running below potential for a sustained period to create slack and give inflation a chance to come down," Powell commented on Wednesday. 

"It's also worth noting that these rate hikes have been large and they've come quickly, and it’s likely that their full effect has not been felt by the economy. So there’s probably some additional tightening - significant additional tightening in the pipeline."

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In June, Federal Reserve officials highlighted the need to tackle inflation, even if it came at the cost of slowing the economy amid the looming threat of recession. They said that the US central bank’s July meeting would likely see another 50 or 75 basis point move on top of a 75 basis point increase that was approved in June. 

“In discussing potential policy actions at upcoming meetings, participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee's objectives,” the minutes read.

“In particular, participants judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting. Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognised the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist.”

[ymal]

The recent Ukraine war has been the touchpaper for a multi-national cost of living crisis that had in fact been some time in the making. COVID-19, commodity prices and the environmental imperative, to name but three factors, have coincided to push prices of goods and services across the board to all-time highs. The result has been a surge in inflation, with the UK alone now hitting 9% in April.

Just as it was with the pandemic, the question on everyone’s lips is ‘when will this be over?’. Key institutions are scrambling to respond, and governments are introducing short-term, palliative measures in the hope of staving off recession. But the true answer may be that increased prices are here for good. It may be that the world needs to adjust to new realities in the way we buy and live. But what are the key costs causing this crisis for consumers, and how are they likely to change over time?

Energy

The first major culprit in the cost of living crisis is energy. This increase was underway well before the recent war, as wholesale prices had steadily risen in response to increased global demand, and the push towards greener but more expensive energy production.

These factors are here to stay, and while we may see a stabilising over the next two-three years, a return to previous levels is highly unlikely – and that means a new and more challenging ‘normal’ for consumers. This gloomy prognosis is even more likely for Europeans, now deprived of Russian energy sources that will continue to be shut off or severely curtailed for the foreseeable future.

Food

Next comes food. Myriad factors are driving up shopping basket prices, but at the highest level, changing weather patterns around the world are responsible for significant disruption in the way the world farms and produces. Critical foodstuffs have been massively affected by atypical weather events over the past few years. Supply chain disruption caused by COVID-19 is another major contributor, with factories and logistics facilities having to limit and re-configure labour usage to limit the spread of infection. Finally, the drive towards sustainability has seen great increases in production costs, as the world increasingly demands that food is produced in a greener way and under improved labour and animal welfare conditions.

All of these are long-term factors - adjusting to changing weather patterns, for example, could take the world decades to solve, and environmental concerns are unquestionably here to stay. Again, prices may stabilise in the medium term, but a return to previous levels is almost out of the question.

Interest rates

Many central banks, including in the UK and the US, are raising interest rates in an attempt to combat inflation. But while those with savings may benefit, the result is also a significant increase in the cost of consumer borrowing. Mortgage rates are going up, as is the cost of credit at just the time when consumers are having to rely on it more than ever.

These actions could potentially be reversed in the medium term. If inflation can be stabilised, governments might in 2-3 years be in a position to reduce rates once more – but that ray of hope is dependent on a host of other factors in the wider economy.

The value of financial understanding

It seems almost certain that a higher cost of living is here to stay. But that doesn’t mean there’s nothing we can do about it.

W1TTY is a young finance brand with a growing customer base amongst students and young people. As quickly as we’re taking off, we’re also acutely aware of what our customers are facing in managing their finances as the cost of living crisis continues.

In-depth educational services are needed right now to help young people deal with these issues. With so many facing a tougher challenge in balancing their budgets, it’s never been more important that they’re equipped with the understanding, know-how and responsible signposting that will help them to make prudent decisions about their money.

Young people deserve to have bright financial futures. Through a combination of loyalty and reward schemes, gamified learning and personalised features, W1TTY is about empowering our customers with accessible, engaging education and saving incentives. By doing so, it’s our aim that we can help insulate them from some of the worst impacts of the current crisis.

About the author: Ammar Kutait is the CEO and Founder of W1TTY.

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Key to my approach to markets is that they require political stability to thrive – hence the most remunerative markets tend to be found within the most stable nations. They tend to have robust and enforceable legal systems, solid financial infrastructure and a culture enabling transactions and risk-taking. That’s the key to understanding the fundamental strength of the City of London – centuries of stability.

All around the world, we are now seeing a rise in instabilities – triggered by supply chain breakdowns, the supply shocks in Energy and Food, and now wage demands. Nations are struggling with inflation, rising interest rates, higher debt service costs on borrowing, rising bond yields, currency weakness, and how to address multiple vectors of financial instability as they try to hold their financial sovereignty together.

It’s occurring at a time when we seem to have reached the lowest common denominator in the political cycle. That’s a critical problem – voters need leadership in crisis, and they can easily be fooled by populists.

Confidence in a nation’s political direction and leadership is one of the key components of the Virtuous Sovereign Trinity, my simple way of explaining how Confidence in a country, the value of its Currency, and the Stability of its bond market are closely linked. When they are strong – they can be very strong. Strong economies rise to the top.

But, if any one of the Trinity’s legs were to fracture, then the whole edifice could come tumbling down. Which is why we should be concerned sterling is down over 10% this year. It strongly suggests global investors have issues with the UK.

Key to my approach to markets is that they require political stability to thrive – hence the most remunerative markets tend to be found within the most stable nations.

The UK is a good example of what might go wrong. If confidence wobbles in the government’s ability to handle the multiple economic crises now upon us, particularly the rising tide of industrial unrest as workers demand higher salaries to cope with inflation or servicing the nation’s debt, then the UK’s currency and bond markets could come under massive pressure. Investors will demand a higher interest rate to account for the increasing risk inherent from investing in the UK, while the currency could tumble as investors sell gilts to buy less vulnerable more stable nations.

At least the UK is financially sovereign. We control our own currency. Sterling may weaken, but we can always print more to repay debt… Except that would probably cause a global run on sterling as confidence in the UK would further tumble. If the currency leg were to fracture, interest rates would have to rise, wobbling confidence further.

The Virtuous Sovereign Trinity sounds stable, but experience shows it can quickly turn chaotic if issues are not swiftly addressed.

Clearly, the UK has some current confidence “issues” regarding the incumbent political leadership. The growing perception that Boris is a “lame duck” magnifies internationally held concerns about how his government has failed to seize the opportunities (such as they were) from Brexit, doubts about energy and food security, and the apparent dither in policies are all perceived as reasons for sterling weakness and are another reason bond yields are rising as global investors exit.

While the UK’s debt quantum should be manageable – Italy is somewhat different. As part of the Euro, Italy is no longer financially sovereign. It has rules on Debt/GDP to observe (and ignore). But effectively Italy borrows in a collective currency it has no real control over. It has to plead with the ECB for the right to borrow money and will rely on the ECB to announce special measures to make sure its debt costs don’t turn astronomical. Without the ECB, Italy would be heading straight for a debt crisis.

That’s why ECB head Christine Lagarde is desperately trying to guide the ECB towards the establishment of anti-fragmentation policies to stop Italian debt instability leading to a renewed European sovereign debt crisis. Fragmentation means Italian bond spreads widening to Germany – the European sovereign benchmark. It’s a political issue because Lagarde is no central banker, but a politician sent in to lead the ECB to the inevitable compromise that rich German workers will pay Italians’ pensions.

In the USA there is an even larger political impasse developing. The US Supreme Court’s decision – by 4 old men and one catholic woman appointed by Trump – to deny women the right to control their bodies by undoing abortion rights highlights the increasingly polarized nature of US politics. Republicans, and their fellow travellers on the religious right, are delighted. Democrats are appalled.

US politics simply doesn’t work. All efforts by Biden to pass critical infrastructure spending have been stymied. There is zero agreement between the parties – each has destroying the other at the top of its to-do list, rather than rebuilding the economy. The result is increasing doubts on the dollar. It’s a battle the Republicans are winning by dint of managing to stuff the Supreme Court with its appointees. It’s no basis for democracy or market stability.

At the moment the dollar is the go-to currency, and treasuries are the ultimate safe haven. It could change. The world’s attitude to the US is evolving. The West may be united on Ukraine, but global support is noticeably lacking. 35 nations representing 55% of the global population abstained from voting against Russia at the UN. The Middle East and India see Ukraine as a European problem and a crisis as much of America’s making. As the West lectures the Taliban on schooling girls, the Republican party has moved the US closer to a dystopian version of The Handmaid’s Tale of gender subjugation.

As the World increasingly rejects America, then America will reject the rest of the World. Time is limited. The Republican Administration, run by Trump, or kowtowing to him, will likely pull the US from NATO and isolate itself. That’s going to become increasingly clear over the next few years. The dollar, the primacy of Treasuries… will leave a massive hole at the centre of the global trading economy.

It will be particularly tough for Europe. As we seek alternative energy sources, what happens when Trump 2.1 proves as pernicious as Putin and shuts off supplies?

The supreme court decision was clearly timed to come at the Nadir of this US political cycle – a weak president likely to lose the mid-terms in November – when the Roe vs Wade news will be off the front pages. It means the damage to the Republicans in the Mid-Term Elections could be limited – they will still make the US essentially ungovernable for the next 3 years.

If the US was a corporate, it would be a massive fail on corporate governance. But it’s not. It’s the current dominant global economy and currency. Politics and markets can’t be ignored.

Speaking to CNBC, Harris, the founder of Cribstone Strategic Macro, said that a major issue for the UK economy is that its mortgage market is “heavily short-term”. He pointed to the contrast between much of Europe and the US, where many people opt for long-tenure mortgages instead of short-term loans of less than five years. Tracker mortgages, which fluctuate with the Bank of England’s base rate, are also popular in the UK.  

Harris said that the problem with this is that rate rises would immediately trigger losses to household incomes, though may not actually address rising inflation. Harris said that the UK “imports inflation” and that the effect of interest rate hikes by the country’s central bank isn’t simply a rebalancing of supply and demand. 

Last Thursday saw the Bank of England increase interest rates by a quarter of a percentage point to 1% — the highest interest rates have been in 13 years.

“Here. we’re actually not really dealing with a pure situation where we’re trying to slow the economy, we are ultimately trying to rebalance expectations, and the U.K. is a country that imports inflation ... So we’re not effectively in a position where we’re free effectively to just focus on supply and demand,” Harris told CNBC.

“We get stuck in a situation where global inflation is driving our inflation at this stage, we have to hit the consumer and instead of just reducing the propensity to spend in the future, we’re actually taking further money out of household income, which doesn’t happen in the US.”

With ongoing chaos caused to industry in the east of the country and a blockade of Black Sea ports in the south, Ukraine’s GDP is projected to drop by approximately 45% in 2022. 

The World Bank warned that Russia will likely also fall into recession, as will many other countries surrounding Ukraine, with some likely to soon require external support from international agencies to prevent them from defaulting on existing debts. 

On Sunday, the World Bank said, “The war is having a devastating impact on human life and causing economic destruction in both countries, and will lead to significant economic losses in the Europe and central Asia region and the rest of the world.”

“It comes at a particularly vulnerable time for ECA as its economic recovery was expected to be held back by scarring from the pandemic and lingering structural weaknesses. The economic impact of the conflict has reverberated through multiple channels, including commodity and financial markets, trade and migration links, and the damaging impact on confidence.”