UK set for recession and pound test of historic lows, survey finds

More than four-in-five respondents expect a recession within a year, while most see the pound at risk of touching early-pandemic lows and bad days ahead for British stocks and bonds.

Close to three-quarters of respondents in the  survey were bearish about the country’s future at a time when the cost of living is surging, growth is slowing and relations with its biggest trading partner -- the EU -- are souring. Picture: David Levenson/Bloomberg

Six years after Britain decided to leave the European Union, market participants see a country in crisis: The UK is stumbling toward recession as inflation spirals while the pound is on course to retest historic lows.

Close to three-quarters of respondents in the latest Bloomberg MLIV Pulse survey were bearish about the country’s future at a time when the cost of living is surging, growth is slowing and relations with its biggest trading partner -- the EU -- are souring. More than four-in-five expect a recession within a year, while most see the pound at risk of touching early-pandemic lows and bad days ahead for British stocks and bonds.

Unease has gripped the nation. Prime Minister Boris Johnson, whose own party has attempted to remove him from power, is risking a renewed trade fight with the country’s all-important EU neighbours as he looks to rejig the post-Brexit settlement. The rising cost of living, fueled by supply chain issues and the war in Ukraine, is becoming a bigger worry, as are concerns about growth.

“The UK looks to be in one of the worst positions,” said Oliver Blackbourn, a London-based portfolio manager at Janus Henderson, which oversees more than $360bn (€342bn) globally. The country’s situation is “more stagflationary than other major regions, with higher current inflation, expectations for a more prolonged surge in prices and weaker forecasts for economic growth in 2023.” 

Most survey respondents decidedly downbeat about UK assets MLIV users were asked what the pound, which is already down around 10% this year to $1.22, would do first: sink further to $1.15 -- nearly matching the multi-decade low it hit early in the Covid pandemic -- or rebound to $1.35? Around 76% of respondents in the survey, which was completed by 538 participants, predicted the more gloomy outcome.

Central banks from Washington to Zurich are raising their benchmark rates to suppress inflation. The Bank of England on Thursday raised interest rates for a fifth straight meeting. Policy makers were divided on just how big the increase should be, underscoring the difficult position they’re in balancing the need to control inflation without destroying growth.

Other experts are divided, too. Karen Ward, chief market strategist for Europe at JPMorgan Asset Management, said the BOE was moving too slowly and “may have to deliver more rates rises further down the line.” However, David Bharier, head of research at the British Chambers of Commerce, was worried that “the decision to raise the interest rate will add concern to businesses amid a weakened economic outlook.” Against that backdrop, around two-thirds of MLIV poll respondents see the yield on 10-year UK bonds -- currently just under 2.5% -- hitting 3.25% before they touch 1.25%.

Meanwhile, UK stocks, which have thus far held up relatively well compared to major developed-market peers, are seen facing some pain, according to the survey that was conducted June 13-17. The FTSE 100 Index is down just 5% this year versus a loss of 23% for the MSCI World Index. But 57% of Pulse respondents reckon the British gauge will underperform the global benchmark for the rest of 2022 and 72% see the FTSE ending 2022 down in absolute terms.

• Bloomberg