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UK Economics Weekly

UK Economics Weekly

Closer to lift-off, but rates not going to the moon

We still think it is more likely that the first hike in interest rates will come next year rather than this year. But irrespective of when it happens, the key point is that the subsequent pace of monetary tightening is likely to be more gradual and slower than is currently priced into the financial markets.

15 October 2021

UK Economics Weekly

Good politics on wages meets bad economics

The government’s plan to decrease the UK’s reliance on migrant labour in order to boost wages may be good politics, but it is not good economics. While labour shortages may push up wages in some sectors, if they push up costs and prices then that will just squeeze the real wages of workers in the rest of the economy. Indeed, without a step-up in productivity, any push for higher wages is likely to mean higher inflation.

8 October 2021

UK Economics Weekly

Economy running on fumes

There’s little doubt that the fuel crisis and the broadening product and labour shortages will slow the UK economy’s recovery. This comes at a time when the government is unwinding its fiscal policy support and the threat of an imminent rise in interest rates looms over the economy. As a result, we now expect the economy to stagnate in September and October and to only get back to its pre-pandemic level in Q1 2022, a quarter after the euro-zone.

1 October 2021
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UK Economics Weekly

Why we changed our mind on the BoE

There were two key reasons behind our decision to forecast that the Bank of England will first raise interest rates in 2022 rather than in 2023. First, there is more evidence that the rise in inflation is feeding into faster underlying wage growth and higher inflation expectations. Second, the Bank’s reaction function appears to have changed as it seems less willing to look through a temporary rise in inflation. That said, we still think that the Bank will raise interest rates a little later than the February 2022 date priced into the market and to a lower level by the end of 2024 than investors expect.

UK Economics Weekly

Weak activity news likely to stave off rate hike

On the back of the surge in inflation in August and the blistering increases in wholesale gas and electricity prices, investors and some economists have shifted their expectations of the first rate hike into Q1 2022. But a rate rise anytime soon would probably prove counterproductive. Meanwhile, we continue to think that inflation fears will ease in time, as supply shortages wane. However, the big risk is that inflation expectations keep rising and that the MPC judges in 2022 that they are too big to ignore, whatever is happening to the real economy.  

UK Economics Weekly

Economic recovery enters a more challenging phase

The economy is entering a more challenging phase of its recovery from the pandemic as it is having to deal with another rise in COVID-19 cases and both product and labour shortages. We think the recovery will continue, but it will be harder going than over the past six months and will come alongside a period of higher inflation.

UK Economics Weekly

From not enough jobs to not enough workers

It’s remarkable how quickly the fear keeping policymakers awake at night has shifted from there being too many people out of work to there not being enough people to fill all the vacant jobs. Interestingly, the furlough scheme minimised the rise in unemployment during the worst of the pandemic and the closure of the scheme at the end of September may help to ease the current labour shortages.

UK Economics Weekly

Shortages threatening to stifle the recovery

The list of anecdotal reports of labour and product shortages has grown ever longer in the past week and pose two major risks to the economy. First, that the near-term recovery will be slower than we expect. Second, that if they persist for longer than we suspect then inflation might not drop back to 2.0% in late-2022. These dual risks of slower GDP growth and higher inflation sound like a gentle whisper of stagflation.

27 August 2021
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