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.
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 Markets Outlook

Markets mistaken on speed of rate hikes

Although the economic backdrop has recently become less favourable for UK asset prices, we expect that the economic recovery will regain some vigour in the second half of next year, that CPI inflation will fall close to the 2.0% target in late 2022 and that over the next two years the Bank of England won’t raise interest rates as fast or as far as investors expect. As a result, we expect 10-year gilt yields to rise from close to 0.90% now to only 1.50% by the end of 2023 and we think the FTSE 100 will climb from around 7,225 now to 8,000 by the end of 2023. Relative to our US forecasts, the rise in bond yields is smaller and the increase in equity prices is larger. That said, we are not expecting the pound to strengthen against either the dollar or the euro. In fact, the risk is that it weakens against both.

22 November 2021

UK Data Response

Consumer Prices (Oct.)

When coupled with yesterday’s decent labour market release, the bigger-than-expected leap in CPI inflation in October makes an interest rate hike in December even more likely. That said, we still think the markets have gone too far by pricing in interest rates rising to 1.00-1.25% by the end of next year.

17 November 2021

UK Data Response

GDP (Sep. & Q3)

The economy regained some momentum in September, but continued shortages and the drag on real incomes from higher utility prices probably mean it will soon fizzle out. That’s one reason why we doubt that the Bank of England will raise interest rates above 0.50% next year.

11 November 2021
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