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With debt set to be 100.6% of GDP at the end of this year, the relationship between growth and interest rates becomes key. If debt remains above 100% of GDP the economy is then in a precarious position – particularly if growth disappoints and if rates stay high because of inflation. In that scenario, the economy could slip into a debt trap, where the ratio of debt keeps rising. The UK is not in this situation yet, and should avoid it, but how this plays out with the relationship between nominal GDP and interest rates in coming years is key.
It was once said that there are three things in life you can be sure of: death, taxes and financial crises. To that can be added a fourth: banking bailouts.
Markets continue to be concerned about where inflation and policy rates will settle. In this context, some key themes we have highlighted in recent years warrant immediate attention, as they have come to the fore of the present market debate.
Two years ago our focus was on the “three P’s”, now it is on the “two P’s”. Then it was about inflation, now we are referring to interest rates. In 2021, we were worried about inflation – then the question was whether rising inflation would pass-through, persist or be permanent.
What to expect in 2023? Inflation peaking, rates plateauing and growth recovering is a likely scenario, and points to a more favourable outlook for markets. As the year progresses, positive sentiment may focus on the likelihood of a stronger 2024, with growth picking up compared with 2023. Such an environment would not suggest interest rates fall in 2024, as has been speculated on recently.
As we look towards 2023 it already looks set to be the year of the good, the bad and the uncertain.
The immediate economic outlook for the UK is poor. Since the 2008 Global Financial Crisis (GFC), the UK has been a low growth, low productivity and low wage economy. Now, in the wake of the Autumn Statement it appears to be becoming a high tax and high public spending economy, too.
UK monetary policy leaves much to be desired – and we should examine the reasons why. The last week has seen both the US Federal Reserve and the Bank of England raise policy rates by 0.75%. There, however, the similarity ends.
This column is not going to comment on the political problems engulfing the UK. You will be able to draw your own conclusions from that ever-changing environment. But political uncertainty is hanging over the UK outlook, although the risk-premium that was attached by the markets to UK assets in the wake of the mini-Budget has all but gone. Instead, here, the focus is on the economic and policy environment.
The International Monetary Fund (IMF) has just released their global economic outlook. It makes sober reading. But it may yet prove too optimistic about the year ahead. As the chart shows, the IMF sees the world economy slowing from its strong post-pandemic rate of 6% last year, to 3.2% this year and 2.7% next year. On this measure, anything around 3% or below is very weak.
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