UK

UK Economics Weekly

At risk of stalling, but Q3 may make up for Q2’s weakness

This week brought further signs that the “pingdemic” weighed on economic activity and evidence that in June, consumers amassed excess savings at a faster rate than in May. As a result, there’s clearly a risk Q2 GDP growth will be weaker than we previously thought. However, with the “pingdemic” likely to ease over the next month, COVID-19 case numbers falling and our CE Mobility Tracker and new electronic card payments ticking up, we are sticking with our forecast that GDP will return to its pre-virus peak in October. Even so, it’s clear that any further big gains in activity may have to wait until August.

30 July 2021

MPC Watch

Divisions emerge, but early end to BoE’s asset purchases unlikely

While the Bank of England will upgrade its near-term forecasts for inflation in its Monetary Policy Report (MPR) published on 5th August, it will probably still judge that the rise is transitory. And while Monetary Policy Committee (MPC) member Michael Saunders may break ranks to vote in favour of an early end to the Bank’s net asset purchases, we do not think others will join him in signalling that interest rate hikes are drawing closer.

29 July 2021

UK Data Response

Money & Credit (Jun.)

The money and credit data showed that consumers were willing to take on more debt in June. However, with consumers accumulating excess savings at a faster pace, there were signs that the resurgence in virus cases may have triggered some consumer caution, which could weigh on the recovery.

29 July 2021

Key Forecasts

Main Economic & Market Forecasts*

%q/q(%y/y) unless stated

Latest

Q2 2021

Q3 2021

Q4 2021

Q1 2022

Q2 2022

Q3 2022

Q4 2022

2021

2022

2023

GDP

-1.6(-6.1)

+5.0(+22.3)

+2.8(+7.5)

+1.3(+7.5)

+1.2(+10.6)

+1.0(+6.4)

+0.6(+4.2)

+0.6(+3.4)

(+7.0)

(+6.0)

(+2.5)

CPI Inflation (%)

(+2.5) (Jun.)

(+2.0)

(+2.7)

(+3.9)

(+3.9)

(+3.1)

(+2.2)

(+1.6)

(+2.3)

(+2.7)

(+1.8)

ILO Unemployment Rate (%)

4.9 (May)

4.8

4.7

4.8

5.1

4.8

4.5

4.2

4.8

4.7

4.0

Bank Rate, end period (%)

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

BoE QE Target, end per. (£bn)

895

895

895

895

895

895

895

895

895

895

855

10-year Gilt, end period (%)

0.57

0.81

0.71

0.75

0.81

0.88

0.94

1.00

0.75

1.00

1.25

$/£, end period

1.40

1.38

1.36

1.35

1.35

1.35

1.35

1.35

1.35

1.35

1.40

Euro/£, end period

1.17

1.16

1.17

1.17

1.17

1.17

1.17

1.17

1.17

1.17

1.17

Sources: Capital Economics, Refinitiv

* * Assumes no major reimposition of COVID-19 restrictions or lockdowns. (See here.)


At risk of stalling, but Q3 may make up for Q2’s weakness

UK Economics Weekly

3 August 2021

Our view

A rapid recovery and unprecedented government support mean that the economy has a good chance of emerging from the COVID-19 crisis without any major scars. That suggests GDP will recover to a higher level than most expect, the budget deficit will decline faster and inflation will rise above the 2% target. But as inflation may not stay above 2% until 2024, we doubt the Bank of England will tighten monetary policy until 2024, rather than in late 2022 as the markets expect. And when it does tighten policy, we think the Bank of England will unwind some quantitative easing (QE) first (in 2024) before raising interest rates (in 2025).

Latest Outlook

UK Economic Outlook

Surge in inflation won’t be sustained

Our forecast that COVID-19 won’t significantly reduce potential supply means that the economy can run a bit hotter for longer without generating the persistent rise in inflation that would require monetary policy to be tightened. Admittedly, this won’t prevent the previous gains in commodity prices and component costs from triggering a rise in CPI inflation from 2.5% in June to around 4.0% by the end of the year. But it should mean that CPI inflation falls back below 2.0% in 2022 and the short-lived spike doesn’t lead to higher pay growth and inflation expectations. That’s why we think monetary policy won’t be tightened until the middle of 2023, which would be a year later than the markets expect.

20 July 2021