Our Perspective.
As we come to the mid-year junction it would appear that a recession in the UK is all but set in stone. Inflation has proven to be more persistent than anticipated, leading the Bank of England to continue raising interest rates. While this “higher for longer” approach may have initially benefited the pound through repriced interest rate differentials, tightening credit and increasing the cost of capital will ultimately slow economic growth and put renewed pressure on the currency. A weaker pound will further exacerbate inflation risks, potentially resulting in a deeper and more prolonged recession.
Interest rates everywhere have risen at a historically unprecedented rate, and corporate debt in the developed world is at historically unprecedented levels. In recent years corporates have been able to refinance at unjustifiably low levels. However, the refinancing cycle is probably over for now!
As we write this month’s commentary, we ask ourselves what this means to credit markets globally. We certainly do not believe the bankruptcy of Thames Water is an isolated case, the question is whether it will be anything as bad as 2008 / 09?
Focusing on the UK, we anticipate a continued contraction in consumer sentiment and demand in the coming months. However, a collapse in demand will also drive down inflation; and considering the strength of the labour market, it could be argued that the recovery might arrive sooner than expected. It is important to remember that whilst situations are often not as promising as hoped, they’re rarely as dire as they may seem.
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