The Recession That Never Happened

Keith Hiscock of Hardman & Co. joins IBKR’s Andrew Wilkinson to examine the role of central banking and how the European economic landscape appears to have avoided a recession.        

Summary – IBKR Podcasts Ep. 136

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this week’s podcast, during which I get brought up to speed with European and UK economics by my guest, Keith Hiscock. Keith is Chief Executive Officer at Hardman and Co. in London. Welcome, Keith. 

Keith Hiscock 

Thank you. Good to be here. 

Andrew Wilkinson 

Keith, 2023 was a year in which central banks globally took upon the fight against inflation by tightening monetary policy. Tell us about the European economy. Where does it sit today? 

Keith Hiscock 

Well, I think both in Europe and the UK, we have seen the peak in rates and I think we’re going to see a gradual reduction. Obviously, the great debate about the speed of that reduction. One’s got to bear in mind that the rate increases have already happened. Take some time to filter through to the economy as a whole. You know, if you’ve got a fixed mortgage, for example, or if you got a car deal, you won’t see the impact of that perhaps for another year or so. So obviously policymakers are aware of that.  

So I think we’re going to see rates coming down gradually. I’ll put some caveats in in a second. And what we’re seeing is a gradual recovery in GDP. Now I think both in Europe and in the UK, there were many commentators who expected there to be a full-blown recession and that hasn’t happened, and they’ve been blindsided by that. But equally, I think the feeling is that the recovery is going to be really quite slow. So, if you look at the forecast for Europe, so last year 2023 growth in GDP was .6% in the Euro area. This year the forecasts are looking like .8% and then 1.5% in ‘25 and ‘26. And I said there are some caveats and there are some fairly obvious caveats such as what happens in in the Red Sea, whether that might delay trade, whether the conflict in the Middle East might expand, and what the effects of that could be. What might happen in Ukraine? So there are all those kind of political economic caveats that might change regulators attitude, in particular to squeezing inflation out of the system.  

So I think we’re seeing a gradual recovery. There are some particular issues in Europe. So the two biggest economies are the ones that are probably struggling most. France and Germany. And I think in the case of Germany, there’s a big worry now about the impact of Chinese car manufacturers in the EV space on their economies. And so you’re starting to see the manufacturers put pressure on the politicians to delay the date when you can’t sell petrol or diesel cars, to think about more tariffs on Chinese cars, all that sort of thing.  

I think they’re beginning to wake up to the threat to one of the biggest industries out there. So those are the kind of bold headwinds out there at the moment. 

Andrew Wilkinson 

It’s interesting that growth is actually expected to be faster this year despite tighter monetary policy. Has the European Central Bank done a good job in controlling inflation to date, do you think? 

Keith Hiscock 

Yes, it has, although quite a lot of it is out of its control. Obviously, commodity prices, oil prices, it doesn’t have any influence over at all. But you’re now seeing inflation in the Eurozone, in November last year it was 2.4%. It will tick up a little bit. It’s expected 2.9% in December, but they should meet the 2% target by 2025, but not December story in the UK. So they have done a good job. I mean I think there was a worry that very tight labor markets  and pressures to compensate for inflation from workforces, particular unionized workforces, to push up rates would make it very difficult to get inflation under control. They seem to have done a good job against that background. 

Andrew Wilkinson 

You’re not talking about very big changes in inflation. I always remember this from European economics. Yeah, it’s certainly the Bundesbank and now the European Central Bank were very hawkish about inflation and where it’s at. But I mean, 2.4% relative to a 2% target, it’s kind of nearly there, right? So what does the projection for monetary policy look like? I mean if they start reducing rates, have you got much further to come down and will it stimulate the economy? 

Keith Hiscock 

Well, just as I said before, putting rates up has to some extent a delayed impact on demand. Bringing rates down equally has a delayed impact on demand. So I think we are going to see rates coming down slowly in the European economy. Remember inflation has been, look at the UK, it’s 11% in 2022, it’s slightly behind where Europe is. But it has come down substantially. You might argue, well, it’s not of the doing of the authorities because we’ve gone through a peak in commodity prices and it’s that that’s really brought it down. So I don’t think they can take all the credit for it. 

Andrew Wilkinson 

Well, let’s turn to the UK economy. What’s the outlook there? I mean, are we going to see faster or slower growth relative to Europe? 

Keith Hiscock 

Slower growth. Slower growth, very clearly. I’ll put some caveats in as always. So as I said,  we didn’t see the recession that people thought we were going to have. That was a surprise. But equally, the forecast, the Bank of England’s own forecast, so there’ll be no growth in 2024. It’ll be a half a percent. In 2025, .8%, in 2026, 1.5% by 2027, you know.  

One of the big debates I think going on amongst economists is, is this the new environment and are we never going to get back to the traditional 2, 2.5% long-term growth rate that we had in the 60s and 70s, et cetera? Are we going to be sort of not much above 0? So we don’t know the answer to that yet, but I mean certainly forecasts will be going up. So if you look at the UK, the forecast of a few months ago for 2025 was that GDP wouldn’t change in 2025. We’re now forecasting at half a percent increase. So it’s sort of going in the right direction, but we’re still not being terribly confident that we’re going to see growth in the UK.  

So in terms of growth, it’s been slow. In terms of inflation, inflation has come down very substantially. Like Europe, it peaked out at 11% in 2022. Back in December it was 4%. So it’s still higher than in Europe, but it’s forecast to get down to 2% by maybe the second quarter of the current year. So there’s that going on. Bank rates are 5.25% at the moment.  It’s the minimum lending rate in the UK. That is going to start to fall by the year end. At the moment, I think the consensus is that it will be down to 3.9% by the year end. The caveats around that are obviously the same caveats for the Euro in terms of what’s going on in the Middle East, what’s going on in Ukraine. But there’s an extra caveat in the UK which is that we have to have a general election by January 2025. It probably won’t be that late. It’s all most likely to be the Autumn of this year. That might cause businesses, consumers to reconsider what their plans are for the year. So far, I think you could say what the opposition is saying at the moment, the polls are showing very clearly that the greatest likelihood is that the Labour Party will get elected with a majority. They’re setting out their policies now, and those policies seem to be essentially, well, we’re going to keep them exactly the same on the financial side as the Conservatives. So maybe one shouldn’t worry. But it’s obviously a bit of a cloud that affects corporate sentiment and consumer sentiment. 

Andrew Wilkinson 

Now the sense of the stock market or the outlook for the stock market is last year stocks in Europe underperformed U.S. stocks quite significantly, but they had a good year. I mean, it was just a very good year for U.S. stocks.  

Will 2024 be better for EU or U.S. markets in your opinion? 

Keith Hiscock 

Well, I think the big decision you have to make is what do you think is going to happen to tech? Because if you think tech stocks are going to perform well, you’ll want to buy the US, not Europe. If you don’t think that, then you can start to look at Euro. We’re seeing very clearly the U.S. economy returning to a remarkable growth rate, which as I’ve just set out, I don’t think Europe or the UK is going to experience. So there’s quite a lot in favorof the U.S.  

However, there are some other things going on, which is part of it. So the European economy and the UK economy are much more international economies than the U.S. economy. Alot of GDPs from trade overseas for Europe and the UK in a way that it isn’t for the U.S. So the performance of markets like China is more important to Europe than it is to the U.S. There’s one sort of slightly countervailing thing I think I put in there, which is certainly in the UK, the UK has been a particularly poorly performing stock market. But we’re starting to see quite a lot of takeovers. There’s quite a lot of buying of interesting assets by private equity or industrial buyers. Or what seemed to be fairly distressed prices. So I think that might start to lift people. If investors in the UK think that actually these valuations are obviously too low because we signal, go out to foreigners, they might start to reassess on that basis. 

Andrew Wilkinson 

One final question, Keith. There’s been a remarkable lack of volatility in the currency markets. I think sterling against the Dollar and Euro against the Dollar has really been in a very, very tight range for a couple of years now. What do you make of that? 

Keith Hiscock 

Well, I think that the main reason for that is probably what’s happening on interest rates and interest rates have certainly supported the European currencies. If we were suddenly to see a forecast that rates are going to come down much more sharply, I think that would have some impact on the currencies and the European currencies. The pound would weaken against others, but at the moment that’s one of the spots. 

Andrew Wilkinson 

And of course, reducing interest rates would be potentially better for the economies. But again, I suppose it really matters why they want to cut interest rates that sharply. If you’re heading for that recession, that elusive recession, I think seems to be one of the big stories here. 

Keith Hiscock 

Yeah, yeah. The recession that never happened. I mean it’s been a really difficult time to be a central banker. There’s probably never a good time to be a central banker, let’s be honest. But they stopped the central banks together with treasuries or chancelleries. Stop there being a massive recession as a result of COVID. You could easily have seen the economies falling over because of COVID. We stopped that happening.  

When do you take the brakes off? How do you take the brakes off without causing untoward effects? It’s easy to look backwards and say rates should have gone up earlier to choke off inflation. That’s very easy to do. It’s very difficult at the time to think of that and having just gone through the most extraordinary period, I guess since the Second World War when economies could have fallen over, you’ve got to give the Central Banks a bit of slack. It’s just unheralded sort of times. And in retrospect, I think they’ve all negotiated it reasonably well. As I say, maybe they should have put rates up earlier to shake off inflation, but it’s very easy for us to say that now. 

Andrew Wilkinson 

Very good indeed. Thank you very much to my guest, Keith Hiscock, CEO of Hardman and Co. in London, for joining me. And Keith, hopefully you’ll come back on for another episode at some point soon. 

Keith Hiscock 

I’d love to do that. Thank you very much. 

Andrew Wilkinson 

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