Data provided by Solve Advisors Inc
April was witness to a tremendous spike in CDS spreads for the U.K. region, owing to prospects of a grave inflation likely to hit the economy in coming months. Experts believe that the pound is likely to slip to levels not seen since the wake of the pandemic with a heavy chance of a recession in the country.
In the previous week ending 4/29/2022, the pound fell to $1.26, and a further slump to a $1.20 – $1.25 range in the coming months in anticipated. UK consumer confidence has dropped to its lowest levels since 2008. Retail sales fell by 1.4% in March, adding to a 0.5% fall in February.
Economists have signaled a decelerating growth and surging living costs, owing to Russia’s invasion of Ukraine, that predicts a fall in GDP for the next two quarters. The slowdown is being driven by high inflationary pressures, which have eroded consumers’ disposable incomes. Real incomes have dropped by 1.8% since May 2021 (ONS figures) and are expected to fall by another 2.3% this fiscal year – the greatest plunge in a single financial year since records began in 1956.
Benefit cuts have added more fuel to the fire. Furthermore, energy prices have risen dramatically in recent months, and the International Monetary Fund estimates that labor shortages in the U.S. and U.K. have led to a substantial uptick in nominal wages, adding 1.5 percentage points to inflation in both countries.
It is also believed that U.K.s economic performance as compared to other G7 countries is nothing but “average”, as the other G7 countries are experiencing similar inflationary pressures.
As per data from Solve, spreads for both IG and HY U.K. CDS securities skyrocketed in April 2022. While the IG CDS spreads saw an approximate 17% increase of 13 bps (from 76 to 89), the HY CDS spreads increased by almost 33%, resulting from a rise of 46 bps (from 139 to 185).