Janus Henderson: Risks of a deeper and longer recession grow daily

18 januari 2023

'European Consumer Price Inflation (CPI) came in at a rounded 9.2% year-over-year, unchanged from the prior month and in-line with expectations. The month-over-month rate of change was a little better than expected by consensus at -0.4%. Of course, the actual inflation rate is still a world away from the European Central Bank’s (ECB) 2% target despite a number of pressures on the headline inflation rate, in particular drastically lower oil and gas prices. Even ex-energy, core CPI is still running at 5.2% year-over-year. It should thus not be a surprise to see at least one, if not both, of the guided further 50bps base rate hikes by the ECB over the coming two policy meetings. Also in the US, inflation continues to run well above target.

Central banks are certainly not running out of excuses provided by the macroeconomic data to continue their monetary tightening course. Nominal job growth remains very strong, unemployment rates are at record lows, and the ratio of open positions versus job seekers remains close to record highs. Consequently, wage inflation continues to become ever more engrained. Look no further than the massive waves of service sector strikes in the UK, or increasingly ambitious wage hike asks by the German labour unions. To break the onset of a wage-price spiral, central banks are likely to accept a recession. Recent stock market hopes for a soft landing and avoidance of a recession, may be misplaced. The risks of a deeper and longer recession are growing daily as the damage from a sharp monetary tightening campaign has already been entrenched with the usual policy lag of up to one year, and each continued tightening step from here just adds to the economic pain down the road.'