Evelyn Reynolds

The U.K. economy contracted by 0.2% in the third quarter of 2022, signaling what could be the start of a long recession.
However, the third-quarter contraction was less than the -0.5% expected by analysts.
The Bank of England last week forecast the country’s longest recession since records began.

The Bank of England has warned that the U.K. is facing its longest recession since records began a century ago.
Huw Fairclough | Getty Images News | Getty Images

LONDON — The U.K. economy contracted by 0.2% in the third quarter of 2022, signaling what could be the start of a long recession.
The preliminary estimate indicates that the economy performed better than expected in the third quarter, despite the downturn. Economists had projected a contraction of 0.5%, according to Refinitiv.

The contraction does not yet represent a technical recession — characterized by two straight quarters of negative growth — after the second quarter’s 0.1% contraction was revised up to a 0.2% increase.
“In output terms, there was a slowing on the quarter for the services, production and construction industries; the services sector slowed to flat output on the quarter driven by a fall in consumer-facing services, while the production sector fell by 1.5% in Quarter 3 2022, including falls in all 13 sub-sectors of the manufacturing sector,” the Office for National Statistics said in its report Friday.
The Bank of England last week forecast the country’s longest recession since records began, suggesting the downturn that began in the third quarter will likely last deep into 2024 and send unemployment to 6.5% over the next two years.
The country faces a historic cost of living crisis, fueled by a squeeze on real incomes from surging energy and tradable goods prices. The central bank recently imposed its largest hike to interest rates since 1989 as policymakers attempt to tame double-digit inflation.
The ONS said the level of quarterly GDP in the third quarter was 0.4% below its pre-Covid level in the final quarter of 2019. Meanwhile, the figures for September, during which U.K. GDP fell by 0.6%, were affected by the public holiday for the state funeral of Queen Elizabeth II.

U.K. Finance Minister Jeremy Hunt will next week announce a new fiscal policy agenda, which is expected to include substantial tax rises and spending cuts. Prime Minister Rishi Sunak has warned that “difficult decisions” will need to be made in order to stabilize the country’s economy.
“While some headline inflation numbers may begin to look better from here on, we expect prices to remain elevated for some time, adding more pressures on demand,” said George Lagarias, chief economist at Mazars.
“Should next week’s budget prove indeed ‘difficult’ for taxpayers, as expected, consumption will probably be further suppressed, and the Bank of England should begin to ponder the impact of a demand shock on the economy.”
Dutch bank ING sees a cumulative hit to U.K. GDP of 2% by the middle of 2023, which would be comparable to the country’s recession in the 1990s.
ING Developed Markets Economist James Smith said the bank was penciling in a 0.3% contraction in economic activity in the fourth quarter, as consumer spending falls away, which would cement the technical recession.
“As the winter wears on, we also expect to see more strain emerge in manufacturing and construction – both of these sectors suffered noticeably during the 1990s and 2008 recession,” Smith said.
“The fall in manufacturing new orders, linked to falling global consumer demand for goods and rising inventory levels, as well as higher energy costs, point to lower production by early 2023. Likewise, the sharp rise in mortgage rates, and the very early signs of house price declines, point to weaker building activity through next year.”
ING expects the Bank of England’s interest rate hiking path to peak at around 4%, but Smith noted that a lot will depend on next week’s fiscal announcements.
“A lot of the focus understandably will be on how the Chancellor closes the forecasted fiscal deficit in 2026/27. But above all, we’ll be looking for details on how the government will make its energy support less generous from April, something which has the greatest scope to reshape the 2023 outlook,” he said.

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Federal Reserve officials welcomed Thursday’s news that inflation might have peaked, but cautioned against getting too excited by the data.
“It’s far from a victory,” San Francisco Fed President Mary Daly said.
Dallas Fed President Lorie Logan called the CPI report “a welcome relief” but noted more rate increases probably are coming, albeit at a slower pace.

Prices of fruit and vegetables are on display in a store in Brooklyn, New York City, March 29, 2022.
Andrew Kelly | Reuters

Federal Reserve officials welcomed Thursday’s news showing that inflation rose less than expected last month, and they noted that interest rate increases could slow ahead.
But they also cautioned against getting too excited by the data, saying that prices are still far too high.

“One month of data does not a victory make, and I think it’s really important to be thoughtful that this is just one piece of positive information, but we’re looking at a whole set of information,” San Francisco Fed President Mary Daly said during a question-and-answer session with the European Economics and Financial Centre.
Daly and other Fed officials were speaking after the Bureau of Labor Statistics reported that the consumer price index rose 0.4% in October, below the 0.6% Dow Jones estimate. The data sent a possible signal that while inflation is still running high, price increases may have leveled off and could soon head lower.
Markets staged a massive rally following the report, with the Dow Jones Industrial Average soaring more than 1,000 points. The policy-sensitive 2-year Treasury note yield tumbled 30 basis points, or 0.3 percentage point, to 4.33%.
While Daly said the report was “indeed good news,” she noted that inflation running at a 7.7% annual rate is still far too high and well off the central bank’s 2% goal.
“It’s better than over 8 [percent] but it’s not close enough to 2 in any way for me to be comfortable,” she said. “So it’s far from a victory.”

Likewise, Cleveland Fed President Loretta Mester said Thursday’s report “suggests some easing in overall and core inflation,” though she noted the trend is still “unacceptably high.”
Kansas City Fed President Esther George noted that even with the lower monthly gain, inflation is still “uncomfortably close” to the 41-year annual high hit in the summer.
“With inflation still elevated and likely to persist, monetary policy clearly has more work to do,” she said.
However, she advocated a more “deliberate” approach going forward, noting that “now is a particularly important time to avoid unduly contributing to financial market volatility.”
Both Mester and George are voting members this year on the rate-setting Federal Open Market Committee.

Market pricing in lower hikes

The Fed has raised its benchmark interest rate six times this year for a total of 3.75 percentage points. That has included a string of four straight 0.75 percentage point hikes, the most aggressive policy tightening since the central bank moved to using the overnight rate as its principal policy tool in 1990.
Market pricing immediately reacted to the CPI news, shifting strongly to the likelihood of a 0.5 percentage point increase in December, according to CME Group data calling for an 85.4% probability of a half-point hike.
“Despite the moves we have made so far, given that inflation has consistently proven to be more persistent than expected and there are significant costs of continued high inflation, I currently view the larger risks as coming from tightening too little,” Mester said.
Other officials also were cautious.
Dallas Fed President Lorie Logan called the CPI report “a welcome relief” but noted more rate increases probably are coming, though at a slower pace. “I believe it may soon be appropriate to slow the pace of rate increases so we can better assess how financial and economic conditions are evolving,” she said.

No rate cuts in sight

Like Daly, Logan said the public should not interpret a slower pace of rate hikes to mean an easing in policy.
In particular, Daly said rates are likely to stay higher for longer and she does not anticipate a rate cut that market pricing indicates could come as soon as September 2023.
Earlier in the day, Philadelphia Fed President Patrick Harker indicated a slower pace is likely but noted the increases still will be significant.
Historically, the U.S. central bank has preferred to hike in quarter-point increments, but the rapid surge of inflation and a slow-footed response from policymakers when prices began surging early in 2021 made the more aggressive pace necessary.
“In the upcoming months, in light of the cumulative tightening we have achieved, I expect we will slow the pace of our rate hikes as we approach a sufficiently restrictive stance. But I want to be clear: A rate hike of 50 basis points would still be significant,” Harker said.
He added that he expects policy to “hold at a restrictive rate” while the Fed evaluates the impact the moves are having on the economy.

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The consumer price index increased 0.4% for the month and 7.7% from a year ago, both lower than estimates.
Excluding volatile food and energy costs, so-called core CPI increased 0.3% for the month and 6.3% on an annual basis, also lower than expectations.
Prices declined for medical care services, used vehicles and apparel. Shelter costs posted their highest monthly gain since 1990.
Markets soared on the report and Treasury yields tumbled.

The consumer price index rose less than expected in October, an indication that while inflation is still a threat to the U.S. economy, pressures could be starting to cool.
The index, a broad-based measure of goods and services costs, increased 0.4% for the month and 7.7% from a year ago, according to a Bureau of Labor Statistics release Thursday. Respective estimates from Dow Jones were for rises of 0.6% and 7.9%.

Excluding volatile food and energy costs, so-called core CPI increased 0.3% for the month and 6.3% on an annual basis, compared with respective estimates of 0.5% and 6.5%.

A 2.4% decline in used vehicle prices helped bring down the inflation figures. Apparel prices fell 0.7% and medical care services were lower by 0.6%.
“The report overstates the case that inflation is coming in, but it makes a case inflation is coming in,” said Mark Zandi, chief economist at Moody’s Analytics. “It’s pretty clear that inflation has definitely peaked and is rolling over. All the trend lines suggest that it will continue to moderate going forward, assuming that nothing goes off the rails.”
Markets reacted sharply to the report, with the Dow Jones Industrial Average up more than 1,000 points. Treasury yields fell sharply, with the policy-sensitive 2-year note tumbling 0.3 percentage point to 4.33%.
“The trend in inflation is a welcome development, so that’s great news in terms of the report,” said Michael Arone, chief investment strategist at State Street Global Advisors. “However, investors are still gullible and they are still impatiently waiting for the Powell pivot, and I’m not sure it’s coming anytime soon. So I think this morning’s enthusiasm is a bit of an overreaction.”

The “Powell pivot” comment refers to market expectations that Federal Reserve Chairman Jerome Powell and his central bank colleagues soon will slow or stop the aggressive pace of interest rate increases they’ve been deploying to try to bring down inflation.
Even with the slowdown in the inflation rate, it still remains well above the Fed’s 2% target, and several areas of the report show that the cost of living remains high.
“One month of data does not a victory make, and I think it’s really important to be thoughtful that this is just one piece of positive information, but we’re looking at a whole set of information,” San Francisco Fed President Mary Daly said in response to the CPI data.
“We have to be resolute to bring inflation down to 2% on average,” she added in a Q&A with the European Economics & Financial Centre. “That’s our goal, that’s what Americans depend on, and that’s what we’re committed to doing. So we’re going to continue to adjust policy until that job is fully done.”
Shelter costs, which make up about one-third of the CPI, rose 0.8% for the month, the largest monthly gain since 1990, and up 6.9% from a year ago, their highest annual level since 1982. Also, fuel oil prices exploded 19.8% higher for the month and are up 68.5% on a 12-month basis.

The food index rose 0.6% for the month and 10.9% annually, while energy was up 1.8% and 17.6%, respectively.
Because of the rise in inflation, workers took another pay cut in October. Real average hourly earnings declined 0.1% for the month and were down 2.8% on an annual basis, according to a separate BLS release.
A separate Labor Department report Thursday showed that jobless claims rose to 225,000 last week, an increase of 7,000 from the previous week.
The latest inflation reading comes as Federal Reserve officials have been deploying a series of aggressive interest rate hikes in an effort to bring down inflation running around its highest levels since the early 1980s.
In early November, the central bank approved its fourth consecutive 0.75 percentage point increase, taking its benchmark rate to a range of 3.75%-4%, the highest level in 14 years. Markets expect the Fed to continue raising, though at a possibly slower pace ahead before the fed funds rate tops out around 5% early next year.
Traders quickly changed their expectations regarding the Fed’s next move. Futures tied to the fed funds rate indicated an 80.6% probability of a 0.5 percentage point move in December, up from 56.8% a day ago, according to CME Group data.
“One data point doesn’t make a trend. What we have to hope for is we get another downtick [in CPI] with the next report, which happens the day before the next Fed meeting,” said Randy Frederick, managing director of trading and derivatives at Charles Schwab. “Markets are poised to respond to anything remotely positive. … It’s kind of like a coiled spring more than anything else.”
Getting inflation down is critical heading into the holiday shopping season. A recent survey by Clever Real Estate found that about 1 in 3 Americans plan on cutting back spending this year due to higher prices.

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Executives, analysts and bond traders are all wondering if corporate finance is about to unravel as interest rates rise.As the Federal Reserve raises interest rates in an effort to tame inflation, the corporate bond market, which lends money to many companies, has been hammered particularly hard.The steep rise in interest rates has caused bond values to tumble: From October 2021 to October 2022, an index that tracks investment-grade corporate bonds is down by roughly 20 percent. By some measures, overall bond market losses have been worse than at any time since 1926.Even the price of bonds issued by the highest-rated corporations have cratered this year.The ICE BofA US Corporate Index, which tracks the performance of U.S. dollar denominated investment grade rated U.S. corporate debt, has severely declined.

Source: Federal Reserve Bank of St. LouisBy The New York TimesThe yield on bonds issued by solid businesses is now about 6 percent, about twice as much as it was a year ago. That number indicates how high of an interest rate rock-solid corporations would have to pay to borrow more money right now; rates are even higher for smaller businesses or those that investors consider risky.Corporate bankruptcies and defaults remain low by historical standards, but a growing number of companies are struggling financially. Businesses in industries like retail, manufacturing and real estate are especially vulnerable because their sales are weak or falling. In many cases, their customers have also been hurt by higher interest rates because the higher borrowing costs have effectively raised the costs of big-tickets items like homes and cars.Until recently, for example, Carvana was a fast growing used car retailer with a soaring stock. The number of cars the company sold fell 8 percent in the third quarter, and its spending on interest payments tripled compared with the same period a year earlier. The interest rate on a big chunk of its debt issued this year that matures in 2030 is 10.25 percent. Its bonds are trading at less than 50 cents to the dollar, suggesting that investors would require Carvana to pay an interest rate of nearly 30 percent if it were to borrow more money for the same amount of time. The company’s stock is down more than 90 percent over the last year.“There’s certainly a lot of headwinds,” Ernest Garcia III, Carvana’s chief executive, said on a conference call with analysts last week. “Recently, we’ve seen car prices depreciate to the tune of give or take 10 percent so far this year, but we’ve also seen interest rates shoot up very rapidly and I think that overall has harmed affordability,” he added, even as he expressed optimism about the company’s ability to weather the financial storm.Carvana, Co. has paid more in interest payments in the last quarter compared to last year and sold fewer cars.Joe Raedle/Getty ImagesBefore rates jumped, companies borrowed a ton of money last year, with lower-rated firms selling more new bonds in 2021 than in any other year. But that flow has turned into a trickle as interest rates have risen and investors have grown more discerning about whom they lend money to. Banks are still making more commercial and industrial loans, but they are also becoming more discerning and are charging higher interest rates.Most investors, executives and economists expect a recession or anemic growth next year, which could make doing business, borrowing money and paying off loans even more difficult.What the Fed’s Rate Increases Mean for YouCard 1 of 4A toll on borrowers. More

Russia’s invasion of Ukraine is one reason that the fuel is scarce. Another is a series of yearslong, intertwined events that cover the globe.HOUSTON — Gasoline prices have dropped as much as a dollar a gallon since early summer, easing a financial strain on many people. But the price of diesel, the fuel that moves trucks, trains, barges, tractors and construction equipment, has remained stubbornly high, helping to prop up the prices of many goods and services.On Wednesday, a gallon of diesel fuel in the United States cost $5.357 on average, according to AAA. That was down from a record of $5.816 in June but well above the $3.642 it cost a year ago. (A gallon of regular gasoline now averages $3.805.)The surge in diesel costs has not garnered the attention from politicians and the public that the jump in gasoline prices did, because most of the cars in the United States run on gas. But diesel prices are a critical source of pain for the economy because they affect the cost of practically every product.“The economic impact is insidious because everything moves across the country powered by diesel,” said Tom Kloza, the global head of energy analysis at the Oil Price Information Service. “It’s an inflation accelerant, and the consumer ultimately has to pay for it.”Sherri Garner Brumbaugh, the president of Garner Trucking in Findlay, Ohio, said the weekly cost of fueling one of her heavy-duty trucks in September was $1,300, more than double the $600 she paid two years earlier. “A good portion gets passed onto my customers with a fuel surcharge,” she said.Both gasoline and diesel prices are tied to the price of oil, which is set on the global market. The price of each fuel immediately shot up after Russia invaded Ukraine in February. But their paths have diverged sharply. Over the last year, the cost of diesel has ballooned by over 40 percent, compared with 11 percent for gasoline.Diesel prices are high because the fuel is scarce worldwide, including in the United States, which in recent years became a net exporter of oil and petroleum products. Oil analysts said there were simply not enough refineries to meet the demand for diesel, especially after Russia’s energy exports fell when the United States, Britain and some other countries stopped buying them.Diesel inventories are always a bit low in the spring and fall, during agricultural planting and harvesting seasons, but this fall supplies are at their lowest level since 1982, when the government began reporting data on the fuel.The tightest market is in the Northeast, where oil refineries have closed in recent years and where the diesel crunch is complicated by winter demand for heating oil. The two fuels are virtually the same but are taxed differently. An especially cold winter could make the situation worse by increasing the demand for heating oil.In Massachusetts, for example, diesel is selling for more than $5.90 a gallon (about $2.33 more than it did a year earlier). In Texas, it costs $4.73 a gallon.Trucks, trains, barges, tractors and construction equipment all use diesel, and its price affects the cost of practically every product.Jim Watson/Agence France-Presse — Getty ImagesWhile Russia’s war in Ukraine sent diesel prices soaring, the current situation is partly the result of an interconnected, slow-building series of events that extends across the globe. Some analysts trace the roots of the U.S. diesel shortage to a fire at Philadelphia Energy Solutions in 2019, which forced the refinery to shut down, taking out one of the Northeast’s important diesel producers.But refineries have been closing elsewhere. Over the last several years, 5 percent of U.S. refinery capacity, and 6 percent of European refinery capacity, has been shut down. A few refineries closed or scaled back because of the collapse in energy demand in the early months of the coronavirus pandemic. Some older refineries were shut down because they were inefficient and their profits weren’t large enough for Wall Street investors. Other refineries were closed so that their owners could convert them to produce biofuels, which are made from plants, waste and other organic material.“Because we shut those refineries down, we don’t have enough capacity,” said Sarah Emerson, the president of ESAI Energy, a consulting firm.As much of the global economy recovered in 2021 and 2022, demand for diesel climbed quickly. But then, after Russia invaded Ukraine, the Biden administration banned Russian oil and petroleum imports, which amounted to 700,000 barrels of diesel and other fuels a day, much of it intended for the Northeast.Diesel prices have also soared so much higher than the cost of gasoline in part because of a decision by the International Maritime Organization several years ago to require most oceangoing ships to replace their high-sulfur bunker fuel with less polluting fuels starting in 2020. That has slowly increased demand for diesel over the last two years.“A substantial amount of diesel is needed in the new bunker blends, and that is a hidden demand for diesel molecules,” said Richard Joswick, the head of global oil analysis for S&P Global Platts. He estimated that the global shipping fleet was now consuming half a million barrels of diesel a day, or roughly 2 percent of the world’s supplies.At the same time, while American refiners are now making tidy profits, 30 percent of their production is being exported. Latin America has become a particularly profitable market, as American diesel replaces fuel from Venezuela, where the state-controlled oil sector has been hobbled by corruption, mismanagement and U.S. sanctions. Some American diesel also goes to Europe.The impact of exports on domestic prices has led some analysts to speculate that the Biden administration could eventually restrict exports to boost supplies at home. But energy experts said that might not have the desired effect because diesel had become a globally traded commodity. Denying Latin America fuel could also backfire because many countries in the region sell crude oil to the United States.“We have a symbiotic relationship with Latin America on diesel and crude,” said Ms. Emerson of ESAI Energy. “We can disrupt that, but it doesn’t immediately fix the problem.”The global diesel shortage was also exacerbated by labor strikes at French refineries this fall. And utilities in Europe have been stockpiling diesel in case they cannot find enough natural gas to fuel their power plants.Russian diesel has continued to flow to Europe since the war began, but stricter sanctions that the European Union plans to impose on Russia in February could potentially cause havoc to the diesel business of traders, banks, insurance companies and shippers.Still, some energy experts said prices could soon begin to ease.Help may be on the way from an unlikely source: China. In recent months, China has been loosening export controls on diesel. Its exports rose from 200,000 barrels a day in August to 430,000 barrels a day in September, and the country has the capacity to sell even more, according to estimates by ESAI Energy.Nearly a third of Chinese diesel exports went to the Netherlands in recent months, taking some pressure off the European market. And oil refineries being built in Kuwait and China could come online as early as next year, further increasing supply.Demand for diesel and its price could also fall if much of the world slides into a recession next year, as some economists and policymakers are expecting.“A deep recession would certainly cut into diesel demand,” said Mr. Joswick of S&P Global Platts. “We don’t forecast a recession, but that is certainly a possibility.” More