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UK Economics Update

UK Economics Update

Weak confidence doesn’t make spending crash inevitable

The recent collapse in consumer confidence to a near-record low has added to the probability that the UK experiences a recession this year. But households’ large stock of savings and the tightness in the labour market means that weak confidence may not weigh on consumer spending as much as in the past.

19 May 2022

UK Economics Update

Can the economy handle interest rates of 3%?

We estimate that a rise in Bank Rate from 0.10% last November to a peak of 3.00% would mean that GDP is around 2.0% lower than if Bank Rate had stayed at 0.10%. That is a smaller drag than the Bank of England has incorporated into its forecasts. We do not expect this to generate a recession, but the risk is very real. The danger is that rising interest rates and falling house prices prompt a negative feedback loop that results in a bigger hit to GDP than we expect.

17 May 2022

UK Economics Update

Next Brexit bust-up risks adding to inflation

The UK government’s plan to use domestic legislation to overwrite parts of the Brexit Northern Ireland Protocol risks creating another headwind for the economy and exacerbating price pressures at a time when CPI inflation is on the cusp of rising to a 40-year high of 9%.

16 May 2022
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UK Economics Update

Dovish sounding MPC may still raise rates to 3.00%

The Monetary Policy Committee (MPC) struck a more dovish tone today while raising interest rates from 0.75% to a 13-year high of 1.00% and saying that it won’t make a decision until after August on whether to shrink its balance sheet quicker by selling gilts. But we think longer-lasting domestic price pressures will mean the MPC ends up raising rates to a peak of 3.00% next year, which compares to the peaks of 2.50% priced into the markets and 2.00% expected by other analysts. We’ll be talking about our forecasts in the light of the MPC decision in a 20-minute online briefing at 15.30 BST today. (Register here.)

UK Economics Update

3% is the magic number for interest rates

Our new forecast that interest rates will be raised from 0.75% now to a peak of 3.00% next year is more hawkish than the peak priced into the financial markets (2.50%) and the peak expected by the consensus of economists (2.00%). That’s because we think that even as economic growth slows the labour market will remain tighter for longer and there is a risk that price/wage expectations don’t come down quickly.

27 April 2022

UK Economics Update

Spring Fiscal Statement 2022 Checklist

We are resending this checklist so clients can have it to hand ahead of today’s Spring Statement. It is designed to help clients keep track of the key economic and public finances forecasts announced during the Chancellor’s Spring Statement speech at 12.30pm and to provide some instant context. We will send clients a Rapid Response immediately after the speech and a more detailed Focus later in the day.

23 March 2022

UK Economics Update

MPC becomes less hawkish, but rates may still rise to 2.00%

Today’s 25bps hike takes interest rates up to the pre-pandemic and post-Global Financial Crisis high of 0.75% and, although the Monetary Policy Committee (MPC) sounded a bit less hawkish than it did at its past meeting in February, it still signalled that rates may rise further in the coming months. We think rates will be increased to 1.00% in May and will reach 2.00% next year.

17 March 2022

UK Economics Update

New higher inflation forecasts and lower GDP forecasts

In response to the news that the US is considering banning imports of Russian oil, which means that commodity prices will probably be higher for longer, we have raised our CPI inflation forecast and will soon cut our UK GDP growth forecast. To reflect the risks, we also illustrate an alternative “worst-case” scenario in which inflation is even higher and GDP growth slows by more. One crumb of comfort is that in both situations the Chancellor has the fiscal space and the scope to boost borrowing to cushion the hit to households’ real incomes. Drop-In (8 March, 10:00 EST/15:00 GMT): We’re discussing Russian energy imports and Europe’s energy needs in this special 20-minute briefing on one of the big sticking points in the western response to the war in Ukraine. Register here.

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