UK Economics Weekly

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

UK Economics Weekly

Ramifications could be bigger if PM stays than if he goes

The growing uncertainty over the Prime Minister Boris Johnson's position is unlikely to dent economic activity. Arguably, though, if a leadership challenge is avoided or Boris Johnson wins it, the medium-term political and economic ramifications could be bigger than if he steps down. Even so, we doubt recent political events will transform the economic outlook this year, which is one of inflation rising to a peak of 7% causing the economy to be weaker than most expect and the Bank of England to raise interest rates from 0.25% now to 1.25%.

14 January 2022

UK Economics Weekly

Household (budgets) to feel the heat in 2022

Against a backdrop of higher inflation, a jump in utility prices and rising taxes, household budgets will come under strain in the coming months. Indeed, we are forecasting the fastest contraction in real wages since the aftermath of the Global Financial Crisis. But we don’t think the impact on households’ overall real incomes will be as big. The government could announce new support measures, while the strong labour market and big stock of household savings should to help cushion the blow.

7 January 2022
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UK Economics Weekly

What we got right and wrong in 2021 and two big risks for 2022

A look at our forecasts for 2021 reveals more hits than misses. While the consensus thought GDP would grow by 5.4% in 2021, we forecast that it would rise by 7.5%. We don't yet have data for Q4, but the indications are that the economy will grow by about 6.8%. Our once-unorthodox view on long-term economic scarring effects is now the conventional view. And our fiscal forecasts weren't a million miles out either. When it comes to 2022, the two big risks are the shadow cast by the rapidly worsening Omicron outbreak and the possibility of longer-lasting supply constraints.   – This will be the last Economics Weekly for 2021. The next Weekly will be sent on Friday 7th Jan. 2022 –

UK Economics Weekly

The hit from “Plan B”, the MPC and better news on shortages

The government’s recently-imposed “Plan B” COVID-19 restrictions mean there is a good chance that the economy contracted in December. If the pressure on the NHS increases, restrictions might be tightened further, implying substantial downside risks to Q1 next year too. Against this backdrop, we no longer expect the Bank of England to raise interest rates from 0.10% next Thursday.

UK Economics Weekly

Christmas parties, Omicron inflation risks, MPC’s dilemma

Some tentative evidence may already be emerging that the Omicron COVID-19 variant may have softened economic activity. It’s less clear what it means for inflation and there’s a risk that it exacerbates current price pressures. That’s why we think the Bank of England’s interest rate decision on 16th December will be a closer call than markets seem to believe. They are pricing in just a 20-30% chance of a hike from 0.10% to 0.25%.

UK Economics Weekly

New virus strain carries dual risks to activity and inflation

The new COVID-19 variant creates the dual risk of weaker near-term activity and, by exacerbating current shortages, the possibility that inflation remains higher for longer. This may make some MPC members less keen to raise interest rates at the meeting on 16th December, although it probably won’t prevent some tightening in policy next year.

26 November 2021

UK Economics Weekly

What if we’re wrong on inflation?

This week’s data releases have made us more confident that the Bank of England will raise interest rates in December. But our forecast that inflation will fall back sharply in 2022 underpins our view that interest rates will rise to only 0.50% in 2022 and will only reach 1.00% in 2023. That said, in an upside scenario where inflation doesn’t fall back as far as we expect, it is possible that interest rates would need to rise to 2.00% by the end of 2023. That would trigger a marked deterioration in the outlook for activity and raise the risk of a recession.

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