UK Economics Chart Book

UK Economics Chart Book

Shortages stifling activity and boosting inflation

The broadening of the recent product and labour shortages appears to be holding back activity and adding to the upward pressure on inflation. The risk is twofold. First, these shortages may prevent GDP from returning to its pre-pandemic peak until next year. After all, the rise in the share of manufacturers reporting labour shortages is consistent with manufacturing output falling by 5%. Second, they could mean that inflation jumps by more than the rise from 2.0% in July to 4.5% in November we already expect. We think most of the shortages will be temporary. That means inflation will probably fall back to 2.0% by late 2022 and the Bank of England may not raise interest rates until 2023. But if the shortages last longer, inflation may stay higher for longer and the Bank may pull the interest rate trigger next year.

9 September 2021

UK Economics Chart Book

Recovery becoming more tepid

With a whopping 1.0 million people on average having been asked by the NHS App or Test & Trace system to self-isolate in July, the “pingdemic” is likely to have stifled the economic recovery in recent months. In July, our Capital Economics BICS Indicator suggests that GDP did not rise much. But new virus cases have fallen substantially since mid-July and there are signs that the full vaccination of 75% of all adults has weakened the link between COVID-19 cases and hospitalisations. So we still think the economy will make good headway in Q3 and that monthly GDP will return to its pre-virus February 2020 level in October. However, it’s possible that virus cases start to climb again, which at some point could prompt the government to become worried about hospital capacity and respond by reimposing restrictions. That remains the biggest downside risk to our economic forecasts.

11 August 2021

UK Economics Chart Book

Inflation risks rising

The risks to our forecast that CPI inflation will rise from 1.5% in April to a peak of 2.6% in November before dropping back in 2022 are increasingly on the upside. Rises in shipping costs and global agricultural commodity prices as well as shortages of semiconductors and labour could all conspire to push CPI inflation higher this year and keep it above 2% next year. At the moment, though, we think that the lingering effects of last year’s collapse in output will prompt many firms to absorb the bulk of higher costs in their margins and to limit pay rather than pass them on to consumers via much higher prices. This “spare capacity” effect explains why we think core inflation will stay below 2% until late in 2023.

10 June 2021
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UK Economics Chart Book

Rapid and robust recovery underway

We’ve been more optimistic than most about the economic outlook since it was announced in November that COVID-19 vaccines were effective. But now that the COVID-19 restrictions are being removed, it looks as though the rebound in activity may be even faster than we expected. We estimate that the reopening in schools drove a 1.5% m/m rise in GDP in March and that the reopening of non-essential retailers/hospitality in April and May might lead to bigger gains. As such, GDP may return to its pre-crisis peak ahead of our forecast of around the turn of the year. A faster recovery would support our view that COVID-19 won’t leave a big scar on either the level or growth rate of GDP in the long term.

11 May 2021

UK Economics Chart Book

Unemployment rate may peak at only 6.0%

The rapid rollout of COVID-19 vaccines, the reopening of schools and the staggered reopening of other sectors from mid-April should mean that the probable fall in GDP in January proves to be the low point of the year. The extension of the furlough scheme from the end of April to the end of September means that by the time it expires, GDP will probably have risen enough to support a level of employment similar to now. As such, the bulk of the falls in employment may now be behind us. Rather than rise from 5.1% in December to 6.5%, we now think the unemployment rate will peak at just over 6.0% early next year.

10 March 2021

UK Economics Chart Book

A heavy January hangover for trade

After having been boosted by stockbuilding ahead of the end of the Brexit transition period on 31st December, exports and imports were always going to fall in January. But the added drags of COVID-19, the new Brexit customs procedures and the surge in shipping costs appear to have caused a very sharp fall. The drop in the export orders index of the manufacturing PMI points to a 5-10% m/m fall in exports in January. And the number of cargo ships in UK ports in the first 24 days of January was 22% lower than in January 2020. We suspect exports will rebound during the year as those drags fade. But as they are unlikely to rise as rapidly as imports, net trade will be a drag on GDP growth this year. WEBINAR INVITE: To mark the upcoming launch of The Long Run, our dedicated long-term service, we’re holding a special webinar on 11th February to discuss how we see economies and markets performing out to 2050. Complimentary registration here for either of two sessions.

UK Economics Chart Book

Vaccines will help the labour market heal

COVID-19 vaccines have dramatically brightened the economic outlook. GDP probably still fell during the second lockdown in November, perhaps by up to 8% m/m, and the strict COVID-19 regional tier system will limit the rebound in activity in the coming months. But the removal of COVID-19 restrictions as vaccines are rolled out more widely next year should allow GDP to recover more rapidly beyond the next few months. As a result, rather than rise to 9%, we now think the unemployment rate will peak at 7%. And if the economy returns to its pre-pandemic level early in 2022, then it might not be that long before the unemployment rate falls back to 4%.

UK Economics Chart Book

Lockdown and Brexit make for a bumpy Christmas

The UK is facing up to the possibility of a festive period dominated by COVID-19 restrictions and Brexit. We think that the England-wide lockdown will shrink the economy by 8% m/m in November and that the rebound in December will be muted. But an extension of the lockdown beyond 2nd December and a no deal Brexit are downside risks. We don’t consider the concerns over Brexit of US President-elect Biden, which may hinder UK-US trade talks, to be an extra downside risk as we have not been expecting a quick US-UK trade deal. The upside risk is that the positive reports about a vaccine, which have buoyed equity markets today, allow the economy to recover quicker in 2021 and 2022.

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