This is how the birthday Queen causes a British recession

Britain's Queen Elizabeth celebrates her 96 today^e birthday. Another Queen's party could throw a spanner in the works from an economic point of view. The extra day off before her throne jubilee in June could make the difference between a slight economic contraction or minimal growth.

A recession often evokes the image of difficult economic times. This may be because of the bad memories of the financial crisis of 2009. In reality, most recessions are little more than a short period in which the economy goes through a bump. All too often that bump has a silly cause. At the end of 2018, for example, the German economy faced heavy weather due to insufficient rainfall in the Alps. As a result, the water in the Rhine was so low that shipping traffic was not possible in some parts of the river. Because complete factories could no longer be supplied, productivity decreased temporarily. The recession Britain may now be heading for falls into the same category: a combination of pure coincidence and bad luck.

recession? Debt of 1952!
The seeds for a possible recession were sown much more than half a century ago. King George VI of the United Kingdom died on February 6, 1952. His daughter Elizabeth succeeded him and at the beginning of this year she had been on the throne for exactly seventy years. That should of course be celebrated and that happens, among other things, through an extra day off at the beginning of June. As a result, the second quarter has one working day less than the same period last year. And that can make the difference between minimal economic growth or a very small contraction. Like mainland Europe, the British economy is already feeling the pain of higher energy prices and soaring inflation.

Energy and inflation: the pain is temporary
This combination causes the purchasing power of British households to fall by almost 2%. That is the highest level in more than fifty years. By way of comparison, purchasing power declined by 1,5% after the financial crisis. The good news is that this is only a temporary phenomenon. Unless energy prices go through the roof again in the next XNUMX months, inflation will gradually ease. In addition, British consumers will have some more financial leeway, thanks to the tight labor market, which translates into higher wages. There is no sign of an impending recession in the exchange rate of the pound on the currency markets.

All eyes on the interest rate market
Although the British currency has taken a step back in recent days, against the euro the pound is more than 5% higher than a year earlier. Despite all the exchange rate fluctuations (exporters: don't forget to hedge your currency risk), the currency is hitting the highest level in more than five years. There is no need to change that for the time being. The currency world pays very close attention to the interest rate market. The Bank of England has been firmly on the accelerator with three rate steps since last fall. Meanwhile, the European Central Bank hardly dares to touch the gear lever. As long as that interest rate differential widens rather than narrows, not even Queen Elizabeth's jubilee can throw a spanner in the works for the pound.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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