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Economists say the UK is facing the worst and longest recession of the G7

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Economists say the UK will face one of the worst recessions and weakest recovery in the G7 next year, as households pay a heavy price for government policy failures.

A clear majority of 101 respondents to the annual Financial Times poll of leading UK economists said the inflationary shock from the pandemic and the Ukraine war will last longer in the UK than elsewhere, forcing the Bank of England to keep interest rates high. And the government to manage a strict fiscal policy.

More than four-fifths expect the UK to lag behind its peers, with gross domestic product already contracting and set to do so for all or most of 2023.

The result is expected to be an intensifying pressure on household incomes, as higher borrowing costs add to the pain already caused by higher food and energy prices.

“The recession in 2023 will feel much worse than the economic impact of the pandemic,” said John Philpott, an independent labor market economist. Others described the outlook for consumers—particularly those with low incomes or mortgage deals that were set to expire—as “difficult,” “bleak,” “bleak,” “miserable,” and “awful.”

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“The combination of declining real wages, tough financial conditions, and a housing market correction is all very bad,” said Callum Pickering, chief economist at Berenberg Bank.

The UK is not alone in facing these challenges: Kristalina Georgieva, Managing Director of the International Monetary Fund, warned Over the weekend, a third of the global economy and half of the European Union will fall into recession this year.

Most economists said the economy would at least return to growth by the end of the year as inflation subsides. “2024 will be much better than 2023,” emphasized Paul Dales, at consulting firm Capital Economics.

But it appears that the downturn in Britain will be deeper and more prolonged. Forecasts compiled by Consensus Economics show that the UK’s gross domestic product will contract by 1 per cent in 2023, compared to a contraction of just 0.1 per cent for the eurozone as a whole and growth of 0.25 per cent in the US.

The UK is extraordinarily vulnerable to global rises in energy prices and interest rates – with a dependence on gas unmatched by storage capacity, and a high proportion of mortgage-bound fixed-rate deals in any given year.

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A bar chart of the 2023 GDP annual growth forecast, by forecast date that shows economists are becoming more pessimistic about the UK economy than other countries

The UK is also unusual in how much its workforce has shrunk since the pandemic. Charlie Bean, former chief economist at the Bank of England, said high inflation was likely to be more persistent in the UK than elsewhere, because its labor market was “unsustainably tight even absent the Ukraine shock”. This “will continue to dampen corporate growth, lead to industrial disruptions and drive domestically generated inflation,” said Anna Leach, deputy chief economist at the CBI.

The UK is suffering from an energy shock as serious as the inflationary crisis in Europe. . . “As bad as the US and a unique problem of labor supply shortages from the combination of Brexit and the NHS crisis,” said Riccardo Reis, a professor at the London School of Economics.

But even after the recovery has begun, most said Britain will continue to be lagged by underlying problems made worse by policy mistakes — poor productivity, weak business investment, government neglect of public services and the damage to trade caused by Brexit.

“The UK is in a structural hole, not a cyclical slowdown,” said Diane Coyle, a professor at the University of Cambridge, who saw little prospect of improving living standards and “even we have a government with a long-term economic strategy that they can pass through Parliament.”

Many saw parallels with the political gaffes and industrial strife of the 1970s, and said the recovery, once it began, would be weak, unfolding “in the long shadow of Brexit” and in the absence of any plan to boost long-term growth.

More than a quarter of respondents said Brexit would be a continuing drag on growth, and Jonathan Portes, professor of economics and public policy at King’s College London, called it a “slow hole for the UK economy”. Many said its devastating effects would become increasingly clear to voters.

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“When they visit the EU on holiday, they will be surprised at how much they can’t afford the things they could have,” said John Llewellyn, partner at Independent Economics Advisory Group.

A significant minority said the UK had an outright deficit of ministers.

“At the moment, the economy is in much deeper trouble than it would have to be if it was managed efficiently,” said Panikos Dimitriadis, former governor of the Central Bank of Cyprus, calling the UK the “sick man” of the G7. .

Stephen King, chief economic adviser at HSBC, noted the “agonizing need to restore financial credibility in light of the Truss/Quarting fiasco” and Ray Burrell, emeritus professor of economics at Brunel University, said encouraging public sector strikes was like “the latest attempt to get class votes”. Central by a failed government.

But while economists agreed on the bleak outlook for the UK, there was no consensus on what policymakers should do about it in the short term.

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The Bank of England has warned that interest rates will likely need to rise again in 2023 to bring inflation back to the 2 per cent target, but how far, or for how long, is less clear.

Jajit Chadha, director of the National Institute of Economic and Social Research, said that with inflation expected to decline rapidly from mid-2023, a “gradual” increase should be sufficient to achieve the target in 2024, with “no need to jump in rapid steps to something much higher than 4 percent.”

Line chart of BoE rate by September 2023. Current rate = 3.5 per cent Shows that markets have room for further UK policy rate increases

Some fear the central bank will go too far. Kitty Ussher, chief economist at the Institute of Directors, said that because it took time for higher interest rates to take effect, people “won’t quite believe inflation is coming down” until mid-2023. That could leave the Bank of England feeling “under pressure from Yes, keep taking action, at the risk of . . . an unnecessarily harsh recession.”

Others warned that even if headline inflation fell quickly, reaching the 2 percent target would be “slow”. “The bank will need to be aggressive to rein in underlying inflation,” said Jessica Hinds, an economist at Fitch Ratings.

Line chart of the annual inflation rate in 2023, by forecast date showing that economists expect higher inflation in the UK

The consistent message from several former BoE rate-setters — including Charlie Bean, Kate Parker, Michael Saunders and founding MPC member Diane Julius — has been that where interest rates peak, they are unlikely to fall quickly. “Critically, the recent upward shift in inflation expectations must be reversed,” Parker said.

With elections approaching, the government will not want to raise taxes again after the massive fiscal consolidation announced in October.

Vicky Price
Vicki Price, chief economic adviser at CEBR, was among respondents who felt big tax changes in 2023 were unlikely, arguing that chancellor Jeremy Hunt had done enough to appease markets. She said: He [the government] Its financial rules are in no way restrictive. © Matt Alexander/PA

Some respondents felt this made major tax changes in 2023 unlikely, arguing that Chancellor Jeremy Hunt had done enough to calm markets. “Its fiscal rules are in no way restrictive,” said Vicki Price, chief economic advisor at CEBR, while Yael Selvin, chief economist at KPMG, described it as “in no way restrictive.”

But others said a slight downgrade to the relatively optimistic outlook of the Office for Budget Responsibility, the financial watchdog, might force the finance minister to reconsider, as it would erase his void against the goal of putting debt on a downward trajectory as a percentage of GDP. Total.

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Economists say the bigger question is whether the government can resist mounting pressure to increase public sector salaries, given the iceberg strikeand support crumbling public services.

“It is likely that the government will eventually give in to the demands for wages in the public sector, in which case tax increases will be inevitable,” said Martin Ellison, professor of economics at Oxford University.

Despite the deep gloom about the UK’s long-term prospects, some respondents found some silver linings. Silvia Ardagna, an economist at Barclays, noted that unemployment is likely to remain low despite the recession, with employers stockpiling workers after their recent struggle for employment.

Charlie Bean
Many former interest rate setters at the Bank of England, including Charlie Bean, have said that where interest rates peak, they are unlikely to fall quickly. © Daniel Acker/Bloomberg

Bronwyn Curtis, non-executive director at OBR, was optimistic “that alternatives to Russian gas will accelerate,” while financial pressures may push dropouts from the job market back.

Meanwhile, Susannah Streeter, an analyst at Hargreaves Lansdown, saw “initial signs of greater cooperation with Europe,” while Ussher said that from the spring onwards, there would be “a boost to sentiment” from turning off the heating and increasing benefits in line with inflation.

But despite the glimmer of hope, few expect the UK to lay the foundations for long-term growth in the coming year. Ian Plenderleth, former rate-setter at the MPC, said the recovery would not look like green shoots, but rather more like “a bit of bush”.

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Richard Davies, director of the Economic Watch and former adviser to the Treasury, predicted that even once inflation subsided, prices would remain high and households would be under severe stress.

He added, “The real roots of prosperity come from constantly increasing productivity. I am less optimistic here.”


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Economic

We need to pay more attention to skewed economic signals

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The writer is chair of Queen’s College, Cambridge and advisor to Allianz and Gramercy

Inflation was the dominant economic and financial issue of 2022 for most countries around the world, especially for advanced economies that have a consequential impact on the global economy and markets.

The effects have been seen in declining living standards, increasing inequality, increasing borrowing costs, stock and bond market losses, and occasional financial mishaps (fortunately small and so far contained).

In this new year, recession, both actual and feared, has joined inflation in the driving seat of the global economy and is likely to replace it. It’s a development that makes the global economy and investment portfolios subject to a wide range of possible outcomes — something that a growing number of bond investors seem to be aware of more than their equity counterparts.

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International Monetary Fund iYou will likely review soon Her economic growth forecasts again, predicting that “a third of the world will be hit by recession this year”. What is particularly notable to me about these worsening global prospects is not only that the world’s three major economic regions – China, the European Union and the United States – are slowing down together, but also that this is happening for different reasons.

In China, a chaotic exit from the wrong Covid-19 policy is undermining demand and causing more supply disruptions. Such headwinds to domestic and global economic well-being will continue as long as China fails to improve the coverage and effectiveness of its vaccination efforts. The strength and sustainability of the subsequent recovery will also require that the country more vigorously renew a growth model that can no longer rely on greater globalization.

The European Union continues to deal with energy supply disruptions as the Russian invasion of Ukraine continues. Strengthening inventory management and reorientation of energy supplies is well advanced in many countries. However, it is not yet sufficient to lift immediate constraints on growth, let alone resolve long-term structural headwinds.

The United States has the least problematic view. The headwinds to growth are due to the Fed’s struggle to contain inflation after mischaracterizing rate increases as fleeting and then initially being too timid to adjust monetary policy.

The Fed’s shift to an aggressive front-load of interest rate hikes came too late to prevent the spread of inflation in the services sector and wages. As such, inflation is likely to remain stubborn at around 4 percent, be less sensitive to interest rate policies and expose the economy to greater risk for accidents from additional policy errors that undermine growth.

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The uncertainties facing each of these three economic areas suggest that analysts should be more careful in reassuring us that recessionary pressures will be “short and shallow”. They need to be open, if only to avoid repeating the mistake of prematurely dismissing inflation as transient.

This is especially important because these diverse drivers of recessionary risk make financial fragility more threatening and policy shifts more difficult, including potentially Japan. Get out of interest rate control Policy. The range of possible outcomes is extraordinarily large.

On the one hand, a better policy response, including improving the supply response and protecting the most vulnerable populations, can counteract the global economic slowdown and, in the case of the United States, avert a recession.

On the other hand, additional policy errors and market turmoil can lead to self-reinforcing vicious cycles with rising inflation and rising interest rates, weakening credit and compressed earnings, and stressing market performance.

Judging by market prices, more bond investors are better understanding this, including by refusing to follow the Fed’s interest rate guidance this year. Instead of a sustainable path to higher rates for 2023, they believe recessionary pressures will lead to cuts later this year. If true, government bonds would provide the yield and potential for badly missed portfolio risk mitigation in 2022.

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However, parts of the stock market is still weakly bearish pricing. Reconciling these different scenarios is more important than investors. Without better alignment within markets and with policy signals, the positive economic and financial outcomes we all desire will be no less likely. They will also be challenged by the risk of more unpleasant outcomes at a time of less economic and human resilience.

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Economic

Macro hedge funds end 2022 higher, investors say, while many others take big losses By Reuters

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© Reuters. FILE PHOTO: Traders work on the trading floor of the New York Stock Exchange (NYSE) in New York City, US, January 5, 2023. REUTERS/Andrew Kelly

By Svea Herbst Baylis

NEW YORK (Reuters) – Some hedge funds betting on macroeconomic trends have boasted of double and even triple-digit gains for 2022, while other high-profile companies that have long been on technology stocks have suffered heavy losses in volatile markets, investors said.

Rokos Capital, run by Chris Rokos and one of a handful of so-called global macro companies, gained 51% last year. Fund investors this week, who asked not to be identified, said Brevan Howard Asset Management, the company where Rokos once worked, posted a gain of 20.14% and Caxton Associates returned 16.73%.

Haider Capital Management’s Haider Jupiter Fund rose 193%, an investor said.

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Data from hedge fund research showed that many macro managers have avoided crumbling stock markets that have been rocked by rapid interest rate increases and geopolitical turmoil, including the war in Ukraine, to rank among the best performers in the hedge fund industry. The company’s macro index rose 14.2% while the general index of hedge funds fell 4.25%, its first loss since 2018.

Equity hedge funds, where the bulk of the industry’s roughly $3.7 trillion in assets are invested, fared worse with a loss of 10.4%, according to HFR data. And while that beat the broader stock market’s loss of 19.4%, some high-profile funds posted even bigger losses.

Tiger Global Management lost 56% while Whale Rock Capital Management ended the year with a 43% loss and Maverick Capital lost 23%. Coatue Management ended 2022 with a loss of 19%.

But not all companies that bet on technology stocks suffered. John Thaler JAT Capital finished the year with a 3.7% gain after fees after a 33% increase in 2021 and a 46% gain in 2020.

Sculptor Capital Management (NYSE::), where founder Dan Och is fighting the company’s current CEO in court over his salary increase, posted a 13% drop.

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David Einhorn’s Greenlight Capital, which bet that Elon Musk would be forced to buy Twitter, ended the year up 37% while Rick Sandler’s Eminence Capital rose 7%.

A number of so-called multi-manager companies where teams of portfolio managers bet on a variety of sectors also boast positive returns and have been able to deliver on their promise that hedge funds can deliver better returns in distressed markets.

Balyasny’s Atlas Fund (NYSE: Enhanced) gained 9.7%, while Point72 Asset Management gained 10%. Millennium Management gained 12% while Carlson Capital ended the year with a 7% gain.

Representatives for the companies either did not respond to requests for comment or declined to comment.

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German automakers point to easing supply chain problems

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Sales at BMW and Mercedes-Benz jumped in the final months of 2022 as the German premium auto brands indicated supply chain problems plaguing the industry were abating.

Automakers around the world have experienced parts shortages since the pandemic, especially semiconductors, leaving many of them with large fleets of incomplete vehicles that can’t be delivered to customers.

BMW and Mercedes each said their full-year vehicle deliveries fell last year by 4.8 percent and 1 percent, respectively, due to Suppliers Bottlenecks as well as lockdowns in China and the war in Ukraine.

But supply pressures eased in the last quarter of the year, as BMW recorded a 10.6 percent jump in sales, with 651,798 vehicles delivered, and Mercedes fulfilling 540,800 orders, up 17 percent from the same period in 2022.

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BMW He said the main effects of supply chain bottlenecks and continued lockdowns were felt in the first six months of the year, adding that “sales were steadily picking up in the second half.”

Mercedes boss Ula Kallenius told the Financial Times last week that the list of problems in the auto supply chain was declining, but added that long waits for cars would continue into 2023.

“One chip is enough to be vital [ . . .] Missing, and then you can’t finish the car, even if you have everything else.

Both brands recorded strong sales growth electric car. Mercedes, which last week announced a plan to build 10,000 charging docks, said EV shipments grew 124 percent to 117,800 last year compared with its predecessor.

Similarly, BMW reported strong growth in electric vehicle sales, with deliveries of fully electric vehicles doubling last year to 215,755.

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Analysts at Bank of America said that sales of electric vehicles, including hybrid cars, reached a historic peak last November, with 1.1 million units sold. They attributed this largely to the upcoming phase-out of customer subsidies in Germany.

Participate in Mercedes BMW and BMW prices held steady Tuesday morning as investors priced in an image of an improving showing.

Rolls-Royce, a subsidiary of BMW, announced Monday that sales have hit a 119-year record, driven by strong demand in the United States, its largest market.

The luxury brand has been largely unaffected by the semiconductor pressure, mainly because it makes relatively few compounds and therefore needs fewer chips.

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