Government leaves itself with some fiscal ammo to utilise later

The net effect of today’s announcements on social care reform may provide a very small boost to GDP. But perhaps more important is that by funding more spending on social care by raising taxes, the government has some room to increase spending further, cut taxes or reduce borrowing even faster ahead of the next general election in 2024.
Paul Dales Chief UK Economist
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UK Data Response

Public Finances (Dec.)

Stronger tax revenues were just enough to offset big rises in debt interest costs in December. But we don’t expect this to last: further rises in inflation will mean borrowing soon overshoots the OBR’s forecast. Even so, our forecasts suggest the Chancellor still has enough fiscal space to cancel April’s rise in NIC taxes. Drop-In (14:00 GMT, 26th Jan): UK Outlook -- More inflation, more interest rate hikes. Join our UK Economics team for a briefing on the 2022 outlook, including why we’re below consensus on growth but think the BoE will raise rates more than most expect. Register here.

25 January 2022

UK Data Response

IHS Markit/CIPS Flash PMIs (Jan.)

The third consecutive decline in the composite PMI indicates that the Omicron variant weighed further on activity in January. But the recent fall in COVID-19 cases, relaxation of restrictions and signs of easing supply shortages suggest the economy will recover quickly. And, given signs of accelerating price pressures, we still expect the Bank of England to hike interest rates a week on Thursday. Drop-In (14:00 GMT, 26th Jan): UK Outlook -- More inflation, more interest rate hikes. Join our UK Economics team for a briefing on the 2022 outlook, including why we’re below consensus on growth but think the BoE will raise rates more than most expect. Register here.  

24 January 2022

UK Economics Weekly

Economy less favourable for whoever’s in Number 10

Although it is hard to predict whether by the end of next week Boris Johnson’s reign as Prime Minister will be solidifying or crumbling, we know that whoever is in Number 10 over the next year will have to deal with the cost of living crisis. Our forecast that inflation will rise to a little above 7% explains why we think GDP growth this year will fall short of the consensus forecast and why we think interest rates will be raised further than most expect, from 0.25% now to 1.25% by the end of the year. Drop-In (14:00 GMT, 26th Jan): UK Outlook -- More inflation, more interest rate hikes. Join our UK Economics team for a briefing on the 2022 outlook, including why we’re below consensus on growth but think the BoE will raise rates more than most expect. Register here.

21 January 2022

More from Paul Dales

UK Economics Update

Inflation expectations – what to watch

The inflation expectations of households, businesses and the financial markets will probably rise in the coming months as actual CPI inflation jumps to over 4.0% later this year. But as the rises are most likely to be confined to measures that capture expectations over the next 12 months rather than over the next 5-10 years, we doubt the Bank of England will respond by raising interest rates this year or next.

25 August 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 Markets Outlook

Economy and policy to provide a bit less support

The recent downward revision to our GDP growth forecasts and the recent hawkish signs from the Bank of England which prompted us to bring forward our forecast of when monetary policy will be tightened means the economic backdrop is a bit less conducive towards rapid gains in risky assets than we previously thought. Admittedly, we still think that the economic recovery will be healthier than most forecasters expect and that the Bank of England won’t tighten policy until a year after the mid-2022 date assumed by the financial markets. As such, we still expect the FTSE 100 to gain some ground on the S&P 500 over the next couple of years. And we think that by rising only modestly from about 0.60% now to 1.25% by the end of 2023, 10-year gilt yields will increase by less than 10-year US Treasury yields.

9 August 2021
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