The GBP EUR exchange rate soared on the week as German economic data and Russian gas fears hinted at a potential recession in Europe’s largest economy. For the UK, IMF forecasts tipped the country to slow down, but narrowly escape recession. Despite government subsidies, inflation data was higher again in Germany. The Spanish and French economies saw record inflation prints on Friday.
The GBP v EUR opened the week around the 1.1750 mark. However, it jumped to touch highs near the 1.2000 level.
IMF cuts UK economic outlook but doesn’t see a recession
The International Monetary Fund (IMF) has cut its growth forecast for the UK in 2023 and expects the country to lag behind other major economies.
That is a far cry from the early post-pandemic reopening, where the UK was positioned to lead the G7 in 2022 and 2023. UK GDP will likely rise by 0.5% in 2023, down sharply from the previous forecast of 2.3% in January. However, Britain is still on course to outpace other nations in 2022, with a growth of 3.2% this year.
The IMF warned of the current problems with Russian gas flows to Europe, renewed Covid lockdowns in China and higher interest rates. The IMF now sees the global economy growing by only 3.2% in 2022, lower than the previous 3.6% projection three months ago.
In the UK, there is a risk of further industrial action after the government threatened action against the rail strikes. Keir Starmer ruffled feathers in the unions by sacking his transport secretary for joining a picket line.
Weaker German economic data continues to flag recession
Economic data this week continues to point to a recession in Germany, with weaker IFO business climate figures and consumer confidence also flagging.
Add the Russian gas problems, where flows are only at 20% of previous levels, and Germans are concerned about the coming months. The latest supply shortage warns of energy rationing for households and businesses. That could also lead to production slowdowns and bankruptcies. Domestic energy bills would rocket higher, and underlying inflation is already a problem.
German inflation came in higher on Thursday despite government subsidies for transport prices. According to economist Clemens Fuest, the country sits on the cusp of recession.
ING analysts said, having judged from the current regional inflation components, the drop in headlines inflation is largely the result of the country’s energy relief package, which went into effect at the start of June. The package will end next month. Even if pricing power in both industry and services appears to have reached its peak, they still expect the “pass-through” from higher prices to last over the summer period, if not into autumn.
They noted that the risk of ending Russian gas for the country pushed gas prices higher over the past few weeks. Energy prices are likely to remain elevated going into winter.
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