Public Finances (Aug.)

August’s public finances figures provided further evidence that the government’s financial position isn’t as bad as the Office for Budget Responsibility (OBR) predicted back in March. But the rumours of the Chancellor’s stricter fiscal rules suggest that in the Budget on 27th October he is more likely to use any windfall to reduce borrowing at a faster pace rather than provide any extra support to the economy.
Ruth Gregory Senior UK Economist
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UK Economics Update

Labour shortages to push up wages for a bit longer

The latest data suggest that the upward pressure on wage growth from labour shortages has a bit further to run. Admittedly, the discovery of the Omicron variant has clouded the near-term outlook for wages and the labour market, with higher virus infections and/or tighter restrictions once again a possibility. Nonetheless, our base case is that most of the upward pressure on wage growth will subside from mid-2022, underpinning our view that Bank Rate won’t need to rise as far as investors currently expect.

30 November 2021

UK Economics Update

Omicron – The risks to GDP and for the BoE

The restrictions announced by the government on Saturday in response to the new Omicron COVID-19 variant increase the downside risks to our GDP forecasts and the chances that the Bank of England delays increasing interest rates until next year. And although the worse-case scenario of another lockdown in January could reduce GDP by something in the region of 3.0% m/m, the one morsel of comfort is that the economy has become more resilient to lockdowns.

29 November 2021

UK Data Response

Money & Credit (Oct.)

The rise in consumer credit in October adds to evidence that economic activity fared well at the start of Q4. But that no longer offers much comfort in light of the discovery of the new Omicron variant. While much remains uncertain, the risks to our (already subdued) GDP forecast appear to the downside.

29 November 2021

More from Ruth Gregory

UK Economics Weekly

Weak activity news likely to stave off rate hike

On the back of the surge in inflation in August and the blistering increases in wholesale gas and electricity prices, investors and some economists have shifted their expectations of the first rate hike into Q1 2022. But a rate rise anytime soon would probably prove counterproductive. Meanwhile, we continue to think that inflation fears will ease in time, as supply shortages wane. However, the big risk is that inflation expectations keep rising and that the MPC judges in 2022 that they are too big to ignore, whatever is happening to the real economy.  

17 September 2021

MPC Watch

Slowing recovery eases pressure to hike

The Monetary Policy Committee (MPC) signalled in August that it is getting closer to raising interest rates, but the gloomy tone of the recent news on the global and UK economies will have reduced the pressure on the MPC to tighten policy. So a rate rise this month doesn’t seem likely. Admittedly, if the recovery regains some pace, it is easy to see some MPC members voting for a rate hike in early 2022. But if we are right in thinking that the bulk of the shortages will prove temporary and that inflation will fall back almost as sharply next year as it rises in 2021, then we think the MPC won’t vote to raise rates until 2023.

16 September 2021

UK Data Response

Labour Market (Jul./Aug.)

The latest data brought more signs that labour market slack is declining fast and that labour shortages are contributing to faster underlying pay growth. We suspect that beyond the next 6-12 months most of these shortages will wane. The danger is that they persist for longer than we expect, causing inflation to stay high and the Bank of England to pull the interest rate trigger next year.

14 September 2021
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