Recession ahead - warning signs

 With the Bank of England blindly raising interest rates without waiting to see the impact the increases have on the economy, the prospect of a recession and high inflation (stagflation) looks highly likely.

The chances of a soft landing are extremely unlikely.  It's a mythical beast which has rarely happened in history  and when it has happened it is more by chance than central bank superior intelligence and planning.

Bond yield curves are considered the most reliable measure of a looming recession.  This is where the yield (interest rates) on short term bonds is more than long term.  In a normal market bond holders are rewarded with a higher yield for tying up their money for the long term.

An inverted yield curve is where the opposite is true.  You get a better yield in the short term than the long term.  This is considered to be a reliable indicator of a recession because people are betting that central bank interest rates will fall in the long term to try and compensate for the recession.

Well the warning signs are out.  The UK bond yield is negative.  

As of 9th August 2023, who else has joined the inverted club with the not so Great Britain?

1. United States
2. Germany
3. France
4. Ireland
5. Singapore
6. Norway
7. Sweden
8. Netherlands
9. Canada
10. New Zealand    +12 other countries with >A credit ratings

The warning signs suggest we are in for a global recession

This poses a massive dilemma for the central banks.  Their normal reaction to recessions is to cut interest rates.  However the outlook for inflation is very sticky - it's expected to be around for years.  The Bank of England in the latest MPC minutes states interest rates will remain high until 2026 in order to combat inflation. 

Well I would say those betting against the yield curves are not making a safe bet.

So if we have stagflation (which looks very likely), what do the central banks do?  Which is the bigger evil?  Recession where civil unrest becomes a real possibility because the public is being punished with high interest rates, high taxation and high inflation OR low interest rates to stimulate growth but potentially higher inflation.  

It is becoming clear that certainly the UK government (and US government) needs to go on a spending diet. Monetary policy to control inflation is not the only lever.  Fiscal policy needs to start happening.  

Austerity 2.0 is needed but that's not an election winner for any political party.

Rwanda has the lowest inflation in the world - maybe it's time to be sign up to be an illegal immigrant and be deported from the UK to Rwanda -  else Japan has to be the next best option to escape the looming financial purgatory.