When the autumn chill blends with the economic downturn

Last autumn, whilst inflation was showing clear signs of rising, we failed to see the problem Putin was creating for us. If we thought we’d seen the worst during the first half of this year, we were deluding ourselves. A protracted Russian invasion, which has become the primary cause of runaway inflation, will be just one of the sources of uncertainty we are set to face. Elections in Italy, a new Prime Minister in the UK and mid-term elections in the US are set to add fuel to an autumn and winter of dire economic prospects. Once again, it is clear that geopolitics is the primary macroeconomic factor in this world, and once again, the geopolitical landscape is painted black.

By Miguel Ángel Temprano

24 August 2022 Reading time: 3.20 mins

A political season is beginning which, whilst its impact on the economy remains uncertain, is shaping up to be a dangerous one.

August, as always, is anything but a quiet month, but as far as the economy is concerned, it has shown us two things: that the economic crisis in Europe is a reality, and that the excellent employment figures in the US only herald further sharp interest rate rises by the Fed to curb inflation, which is still running rampant, which will indirectly accelerate our descent into recession. And as we know, we Spaniards are experts at feeling the full brunt of other countries’ bad economic news.

“The excellent US employment figures point to further interest rate rises in the US, which will inevitably be followed by similar moves in Europe”

Over the coming months, we are set to witness at least three political events of the utmost significance: the mid-term elections in the US, the presidential elections in Italy – the eurozone’s third-largest economy – and the selection by ‘150,000 Tory members’ of who will occupy 10 Downing Street, a democratic anomaly all too common in the United Kingdom. All of this is set against the backdrop of what the Russians regard as a protracted invasion of Ukraine, with its corresponding consequences for Europeans, and a potential cold war between the Chinese and the Americans. As the casino croupier might say, ‘Who’s offering more?’

“Unfortunately for anyone who didn’t vote for Trump and wouldn’t vote for him even if they could, Biden’s first two years in office have been darker than grey”

Biden’s term in office – having won decisively not because he was a brilliant candidate (his age alone was a clear handicap) but because he was the only Democrat capable of mobilising the vote against Trump – is going far worse than even the most pessimistic of Democratic voters could have expected. Despite everything, and just as an aside, I don’t even want to think about what might have happened in Ukraine had Trump been in power. We might just as easily have seen Russia running roughshod over Ukraine, as if we were now living through the Third World War.

In Biden’s two years in office, there have been far more low points than high points, and it is highly uncertain – and that’s putting it optimistically – whether the Democrats will retain control of both houses of Congress after November, when the mid-term elections take place. In fact, if they manage to hold on to Congress, they’ll be lucky to count themselves fortunate.

“Meloni, the far-right Italian candidate, who has declared herself anti-European and is the favourite in the Italian elections, could prove a thorn in the side of the EU”

And this will shape the entire course of presidential policy during the two years remaining of Biden’s term, ahead of another turbulent election – unless Trump is first tried and convicted of summary offences for having taken documents classified as secret. If this does not happen, Trump stands a very good chance of securing the Republican nomination. This will lead Americans who are already staunchly on his side – and understandably so – to want Biden to look inwards rather than outwards, with the resulting detriment to us.

Meanwhile, Italy seems to be heading for chaos. Moving from a magnificent prime minister like Mario Draghi to a far-right, anti-European figure like Meloni. Whilst this happening in Hungary under Orbán is a nuisance, for it to happen in Italy – the eurozone’s third-largest economy – is a far more serious matter.

And the United Kingdom must choose between someone who wants to be like Thatcher and an opportunist. Let no one interpret my words as a criticism of Thatcher. Thatcher and Blair, just like Clinton or Reagan, are politicians I would love to see governing my country one day. But to continue, there has only ever been one Thatcher, and copies never turn out well – even on a photocopier, they always come out smudged.

“Yes, it seems that Germany will have to decide this winter whether to put up with the cold or to produce energy; for the rest of us Europeans – and particularly the countries of southern Europe – this is going to be a bitter pill to swallow.”

Meanwhile, the Germans are going to be colder than a summer in San Francisco. Let’s see how they react to the gas shortage. They’ll have to decide what to use the gas for – whether for heating or for production – and although we’d prefer it to be the latter, the Greens, who are very much present in the government, say otherwise.

And whilst Spain, with a government riven by internal strife that dances to the tune of anti-Spanish forces, repeatedly makes erratic economic decisions, ill-considered and far more political than economic, without realising that if the economy doesn’t work, nothing works – just ask the Russians from the communist era or even the Cubans of today.

I do not know how many of my readers have read the founding charter of the US Federal Reserve and its subsequent amendments by statute. For those who haven’t, here is a summary: the Fed’s primary objective is to tailor monetary policy – for which it has sole responsibility – to achieving full employment; the second is to control inflation at levels optimal for economic growth – there is no specific mandate here, but everyone understands this to be around 2 per cent; and thirdly, to maintain interest rates within a range that allows for economic growth. But the Fed, like everyone else, cannot have it both ways, so it tackles them one at a time, starting with the first.

The employment figures published in August compared with July are simply impressive, so that’s one sorted. Let’s move on to the second issue: inflation is out of control, and whilst it is true that the economy is in what is academically termed a ‘technical recession’, everyone knows that sooner or later we’ll have to pay for inflation, so let’s tackle it – it’s second on the list. And the simplest and most effective way to do this is to raise interest rates. We were all hoping that, after the 75 basis points in July, the rate hike would be moderated in September to ‘just’ 50 basis points, but following the creation of over half a million new jobs and inflation at 8.1 per cent, nobody is betting on the latter any more.

“If that’s true and the Americans end the year with a 3.5 per cent base rate, the Euribor will end up between 2 per cent and 2.5 per cent”

Following the inflation announcement, it took less than an hour for the President of the Federal Reserve Bank of Chicago, Charles Evans—who is also a member of the Fed’s FOMC, the body responsible for setting the Fed’s benchmark interest rate—took to the stage to dampen our spirits by stating that inflation remained out of control and that bringing it under control was a short- and medium-term objective for the Fed. He therefore predicted a benchmark rate of around 3.5 per cent in December ’22 and 4 per cent by the end of ’23.

And now let’s turn to Europe. Germany and Italy will enter a full-blown recession during the coming six months. Spain and France are on course to do the same, reaching that point by the first quarter of ’23 at the latest.

“It would be the last straw if political ineffectiveness meant that the only way to control inflation was to go into recession”

The ECB no longer knows what to do. If it raises interest rates, it will crush the ‘poorly managed’ southern countries; if it doesn’t, it will allow the dollar to appreciate, which will

the crisis will worsen dramatically. And at that point, inflation will fall, but let no one be under any illusion: this will not be due to economic measures taken by the government, but rather because the economy will cool of its own accord as it plunges into a severe recession.

Without wishing to be a prophet of doom, if the US rate ends the year at 3.5 per cent, the Euribor will end up between 2 and 2.5 per cent, with the consequences this will have for all loan renewals, for both individuals and businesses, and, as we know, in the case of the former this reduces disposable income, whilst in the case of the latter it leads to unemployment, which only serves to exacerbate the decline in disposable income. And this is in an economy where our growth is based primarily on domestic consumption.

I once heard the sociologist Michavila – undoubtedly the most insightful in Spain – say that his success lies in studying the data, and I agree with him on that point. If you remove ideology from your analytical framework, the data is the only thing that matters. The economy is driven by billions of small daily transactions, which are greatly influenced by government legislation and geopolitics. That mix isn’t exactly easy to interpret, but it is always far more accurate than if you introduce the ideological factor into the equation, which only distorts reality.

I was recently asked what would have to happen for my predictions not to come true, and I said that, apart from a miracle, it would be for Putin to leave Ukraine with his tail between his legs and for us to become friends with the Russians again. However religious the reader may be, both of these seem impossible, so all we can do is think about how to cope with the misery.