At a crossroads

Rising real wage growth should pave the way for a consumer recovery next year. At the same time, the lifting of Brexit-related uncertainty will set the stage for a sharp rebound in investment spending. This should allow GDP growth to quicken from a miserly 1.3% in 2018 to about 2% in 2019 and 2020. Note that this is predicated on our assumption of a “soft” Brexit, with a status quo transition period paving the way for a free trade agreement with the EU after this 21-month period. However, the risks are to the downside as the chances of a “no deal” Brexit have risen considerably over the past few months. Indeed, we think there is now an almost 50/50 chance that the UK leaves without a deal, which we estimate could knock off between 1 and 3ppts GDP growth next year, depending on the scenario.
Continue reading

More from UK

UK Economics Chart Book

Omicron may weaken activity but lift price pressures

While the emergence of the Omicron COVID-19 variant has increased the downside risks to our GDP forecasts, it has arguably increased the upside risks to our CPI inflation forecasts. The transmissibility, severity and capacity for Omicron to escape vaccines are still unknown. But if Omicron leads the government to close non-essential retail, hospitality venues and schools, we think GDP would fall by something like 3%. As has been in the case in previous lockdowns, that would boost demand for goods relative to demand for services, which may keep goods inflation higher for longer. And as long as the Chancellor revived the furlough scheme, any easing in wage pressures may only be temporary. That suggests the Bank of England will still raise interest rates from 0.10%, although it has become even more uncertain whether lift-off will happen at the policy meeting on 16th December or early next year.

7 December 2021

UK Economics Weekly

Christmas parties, Omicron inflation risks, MPC’s dilemma

Some tentative evidence may already be emerging that the Omicron COVID-19 variant may have softened economic activity. It’s less clear what it means for inflation and there’s a risk that it exacerbates current price pressures. That’s why we think the Bank of England’s interest rate decision on 16th December will be a closer call than markets seem to believe. They are pricing in just a 20-30% chance of a hike from 0.10% to 0.25%.

3 December 2021

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

More from Capital Economics Economist

Emerging Markets Economics Update

EM easing cycles not all to do with the Fed

Financial markets have come round rapidly in the last few weeks to our view that EM monetary policy will be loosened further this year. But EM loosening cycles have much more to do with weak domestic growth and low inflation than the prospect of interest rate cuts in the US.

20 June 2019

European Economics Focus

Cyprus to outperform euro-zone, but risks remain

Cyprus has now recovered from the economic crisis of 2012-13, which was caused primarily by its oversized banking sector. While a number of risks remain, notably the high level of non-performing loans, we expect the economy to continue expanding more rapidly than the euro-zone as a whole for the next few years, and the public debt ratio to fall steadily.

20 June 2019

Emerging Europe Data Response

Russia Activity Data (May)

May’s activity data suggest that, following extremely weak GDP growth in Q1, Russia’s economy has failed to gather much momentum in Q2.

20 June 2019
↑ Back to top