Nothing goes right for the United Kingdom. This fall, it lost its longest-reigning monarch, and a few weeks later, its shortest-serving prime minister announced his resignation.
As it pushed through the greatest interest rate increase since 1989, the country’s central bank, the Bank of England, is now issuing a warning that the nation is on the verge of entering the longest recession in a century.
The committee in charge of determining monetary policy in the UK admitted they are dealing with a “particularly tough outlook” as they announced the 0.75% rate rise to raise the current bank rate to 3%.
The governor of the Bank of England, Andrew Bailey, also acknowledged that the stricter interest rate policy will be difficult for Britons in a press conference following the announcement. However, Bailey continued, “If we do not act strongly now it will be worse later on” considering that the UK’s inflation rate is at 10.1%.
Where does that leave us, then, given the tight ties between the U.S. and the U.K., where every U.S. state has jobs related to a U.K. company’s investment, and where, according to the U.S. Department of State, roughly 1.3 million Americans work for British companies in the U.S.? There are a few solid reasons to think that things won’t be nearly as bad over here, despite the fact that no one loves to watch their comrades suffer.
The job market is healthy.
Economic production and employment typically decrease simultaneously during recessions. Businesses are forced to reduce personnel due to lower revenue, which raises the unemployment rate. In the end, more unemployment results in decreased consumer spending, which starts a vicious cycle.
However, unemployment remains historically low in 2022. The official unemployment rate for October was 3.7%, which was somewhat higher than the previous month but still very similar to the figures prior to the pandemic in February 2020. According to Goldman Sachs experts, a strong job market amid a recession is “historically exceptional.” This exceptionally robust job market might be getting its vigor from another peculiar source: robust corporate finances.
Businesses are cash-rich.
During recessions, businesses experience a reduction in sales and profits. It’s possible that process has already begun. However, American businesses are still making money and are entering this recession with a huge cash reserve. The after-tax profit margin of the typical American firm is currently around 16%, which is the highest level since 1950. This rate falls to single digits during conventional recessions. These companies currently have $3 trillion or more in cash on hand. That is a record level and incredibly out of the ordinary in a recession.
These monies may have been raised by businesses throughout the past ten years of cheap credit and low interest rates. Now that this money is functioning as a cushion, businesses may be able to keep their employees despite the current economic slowdown.
The hawkish stance of the Fed
The Federal Reserve’s hawkish approach is another another peculiar aspect of this crisis. The central bank often lowers interest rates during recessions and increases the amount of money available to the economy.
To combat inflation in 2022, the Fed has aggressively increased rates. The central bank may have more justification to maintain raising rates in light of the robustness of the labor market and corporate balance sheets.
The WSJ’s Jon Hilsenrath argues, “This is unsustainable.” He thinks that either the economy quickly improves, ending the recession, or the economy continuing plunging, forcing firms to make job cuts, will correct this discrepancy.
The “soft landing” and “hard landing” that the Fed has previously suggested might both occur under these two scenarios. Investors must monitor all indications to determine which scenario is unfolding because the consequences could be severe.
If a gentle landing comes, this could be the perfect time to invest in beaten-down growth and tech firms. Investors may need to seek safety in defensive stocks with asset backing, such as healthcare providers and real estate investment trusts, in the event of a harsh landing.
In either event, the Bank of England and investors will undoubtedly look back on 2022 and 2023 as exciting years.
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