As inflation bites, the UK is bracing for further interest rate hikes and the risk of a recession. Germany is already there.
UK Chancellor Jeremy Hunt has said he is comfortable with the UK falling into a recession if it brings down inflation.
He said he would support the Bank of England further raising interest rates to stem stubbornly high consumer prices.
“Inflation is a source of instability,” he told Sky News on Friday.
“If we want to have prosperity, to grow the economy, to reduce the risk of recession, we have to support the Bank of England in the difficult decisions that they take”.
The Chancellor is careful to show that he is in step with the central bank after the market turmoil seen under the short-lived government of Liz Truss, which had criticised the Bank of England’s policy and unveiled a “mini-budget” with massive unfunded tax cuts.
Hunt also spoke of the “very difficult decisions to balance the books so that the markets, the world, can see that Britain is a country that pays its way”.
While the UK’s inflation rate has eased slightly in April, to 8.7 per cent, it remains the highest among G7 nations, with food costs still soaring.
Investors anticipate that interest rates will continue to rise this year and could reach 5.5 per cent by the end of 2023, compared to the current rate of 4.5 per cent.
These increases in borrowing rates have led to a soaring cost of credit, particularly for mortgage rates, impacting British households and businesses alike.
However, for the time being, the British economy has managed to avoid a recession, giving the BoE some room for manoeuvre.
Germany is already in a recession
Germany, Europe’s biggest economy, entered a recession in the first quarter, having recorded two consecutive quarters of falling gross domestic product (GDP).
It’s the first time in three years that Germany enters a recession, after the coronavirus pandemic caused GDP to plummet in the first and second quarters of 2020.
“This is not surprising, even though the scale of the revision is alarming,” commented Jens Oliver Niklasch, an analyst at LBW.
Domestic consumption in Germany fell as inflation stood at over 7.2 per cent in April.
The European Central Bank’s (ECB) recent series of interest rate hikes to combat high inflation further exacerbated the situation, significantly impeding activity.
Abroad, Germany’s trading partners imported fewer “made in Germany” products than usual. The reasons include “geopolitical turbulence, high inflation rates, and loss of purchasing power,” according to the DIHK economic institute.
Despite this slowdown, the German government remains optimistic, forecasting a growth rate of 0.4 per cent in 2023.
“The outlook for the German economy is very positive, and we are in the process of overcoming the challenges we face,” Chancellor Olaf Scholz told reporters on Thursday.
The Ministry of Economy said it expects a “weak winter” but a “clear improvement” thereafter.
Not everyone shares this optimism. The International Monetary Fund (IMF) forecasted in April that German economic activity would contract by 0.1 per cent this year before rebounding by 1.1 per cent in 2024.
Germany’s situation differs from that of its European neighbours, where the risk of recession has gradually diminished due to the decline in energy prices, according to Global Market Insight.
In Belgium and France, economic output rose by 0.4 per cent and 0.2 per cent respectively in the first quarter of 2023 compared with the previous quarter. Italy saw its GDP increase by 0.5 per cent.