The prospect of natural gas prices reaching record highs this winter portends a recession in Europe and the UK.
When the price of gasoline in the United States topped $5 a gallon in June, many Americans thought a recession would soon follow in the United States. Many economists agreed with this when the interest rate curve inverted and the number of initial jobless claims rose. Today, the situation is very different: True, the yield curve is still inverted, but the price of gasoline has fallen to $4 a gallon, jobless claims have stabilized at a low level and the level of US consumer spending surprised the most pessimistic.
While there have been a number of good statements on inflation, hopes that the Fed will not be forced to raise interest rates further in the near future have been dashed by belligerent statements from members of the rate committee. As we discussed last week, persistent high wage and rent inflation in the United States means that the Fed’s 2.0 percent inflation target is out of reach unless we don’t. let’s have a recession.
European motorists would be delighted to be able to fill up at US prices – at just over one euro per litre. The current purchase prices for natural gas in Europe and Great Britain are even eight times higher than in the United States. European consumers are not yet affected – it is summer and consumer prices are still relatively low. But it is in Britain that the scale of the coming catastrophe is most visible. A typical household energy bill was £1,277 a year at the start of the year. It will increase to around 3,600 pounds from October (we will know the exact figure on August 26) and perhaps to 4,200 pounds next January. The annual energy bill of British households would therefore increase by 3000 pounds, an unprecedented figure, in less than 12 months. The government has already hinted at some reductions, but the next Prime Minister will be forced to extend them drastically.
It is hard to escape the conclusion that the economic outlook is significantly better in the United States than in Europe. The strong dollar could get even stronger, and although interest rates are rising in Europe and Britain, the United States must certainly lead the way. What about risky investments? Rising interest rates and a recession are not, in my view, a reason for a bull market in equities.