If the United Kingdom experiences a recession during the year, it is due to an event that occurred more than 70 years ago. On February 6, 1952, King George VI died. He was succeeded by his daughter Elizabeth, who thus sat on the throne for as many as 70 years a few months ago. That calls for a party. In early June, the British have an extra day off.
As a result, the second quarter has a working day less than the same period last year. And that can make the difference between a tiny economic growth, or a very small contraction.
Like mainland Europe, the UK economy is increasingly feeling the pain of higher energy prices and sharply rising inflation.
Purchasing power under pressure in the UK due to high inflation
Rising prices for energy and other goods and services are eroding the purchasing power of British households by almost 2 per cent. This is the highest level since the beginning of the 1950s. And for comparison: in the wake of the financial crisis of 2008 and 2009, purchasing power decreased by 1.5 percent.
The good news is that this is only a temporary phenomenon. Unless energy prices fly through the roof again in the next twelve months, inflation will gradually decrease. In addition, British consumers are given a little more financial space, thanks to the tight labor market that translates into higher wages.
Short-lived British recession
If there is already a recession coming, it will probably hurt less than the economic downturn of 2009. Most recessions are little more than a short period of time when the economy goes over a bump. But all too often, that bump also has a silly cause. At the end of 2018, for example, the German economy was hit by severe weather due to too little rain in the Alps.
As a result, the water in the Rhine was so low that shipping traffic was not possible in some parts of the river. Since complete factories could no longer be supplied, productivity temporarily decreased. The recession Britain may be heading for falls into the same category: a combination of pure chance and dumb luck.
British pound benefits from central bank interest rate policy
The course of the pound shows no signs of an approaching recession. Although the British currency has taken a step back in recent days, the pound is more than 5 percent higher than a year earlier compared to the euro.
Despite all exchange rate fluctuations, the currency is hiccupping at its highest level in more than five years. There is no need to change that for the time being. Indeed, the currency world is paying close attention to the interest rate market.
The Bank of England has its foot firmly on the accelerator with three interest rate steps since last fall. Meanwhile, the European Central Bank hardly dares to touch the gear lever. As long as that interest rate differential gets bigger rather than smaller, even Queen Elizabeth’s anniversary can’t throw a dent in the food for the pound.