Threat of recession remains low as inflation nears its peak

Inflation is close to peaking in the UK and there is only a small percentage chance of the country plunging into recession, business leaders attending a HURST event heard.

Economic growth this year is likely to be lower than forecast at the start of 2022 due to rising prices and the war in Ukraine, while interest rates will continue to rise but are likely to peak at around 2-2.5 per cent, Alex Brandreth also told the audience.

Alex, chief investment officer at Manchester-based Luna Investment Management, gave his latest economic update at a breakfast summit at HURST’s offices which was attended by business owners and senior executives from a variety of sectors.

He explained the reasons for the global inflationary surge which is affecting the US and Europe as well as the UK.

Demand is increasing as economic activity picks up following lockdowns, while the war in Ukraine is also having an impact, with commodity prices such as oil rising.

However, Alex said inflation has already started to fall in the US and he expects it to peak in the UK over the next month or two and then decline.

Given the huge level of government debt in the UK – which has only been surpassed during the two world wars – Alex predicted that interest rates would remain low.

He said a one per cent rise in interest rates would mean £25bn in extra charges for the government, and this burden could lead to a cut in public spending.

Alex said he expects interest rates to continue to tick up but peak at two or 2.5 per cent.

He said the level of UK debt was ‘almost like a runaway train’ which was only going to increase with higher pension liabilities to meet the needs of an ageing population and the financing of the deficit itself.

On the plus side, unemployment is at its lowest level for 60 or 70 years and job vacancies are at a record level.

This is leading to wage inflation, as employers try to entice recruits, but Alex said this was a good thing as it helps people to cope amid high inflation.

Consumers are generally in a reasonably healthy position, having saved money during the pandemic or paid down loans and mortgages.

Alex said predictions at the start of 2022 that the economy would grow by 4.5 per cent this year amid the Covid bounce-back were now off the mark, with current forecasts at around 3.8 per cent, which would be higher than the US, the Eurozone and Japan but lower than China and India.

He added: “I don’t think we are going to go into recession at this moment in time. Inflation will come down and interest rates are rising, but not much higher than they are.”

He put the risk of a recession at between five and 10 per cent.

The services sector economy is strong, with people spending on travel, eating out, cinemas and experiences, rather than buying goods.

Turning to the Russian invasion of Ukraine, Alex said the war has driven up commodity prices and inflationary pressures, contributing to weaker global growth and increased market volatility.

However the FTSE100 has performed well, driven by strong showings for oil and mining stocks. In comparison, the US has greater exposure to technology stocks.

Alex said food inflation would be with us for a while as a result of the war and its impact on supplies of wheat and fertiliser.

In investment terms, people are already looking beyond the war, an approach which should help markets to rally and recover strongly, he added.

However, Covid is still impacting on markets, and investor sentiment remains low, but Alex said market corrections were very common and advised investors to think long-term.

With 60 per cent of the world vaccinated against Covid there is still work to be done to increase the figure, but Alex said: “There is definitely more Covid bounce-back to come.”

Economies have pulled through wars, financial crashes, tech bubbles and now Covid, and Alex’s message was: “Keep calm and carry on”.