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.
Ruth Gregory Senior UK Economist
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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%.

3 December 2021

UK Economics Update

Labour shortages to push up wages for a bit longer

The latest data suggest that the upward pressure on wage growth from labour shortages has a bit further to run. Admittedly, the discovery of the Omicron variant has clouded the near-term outlook for wages and the labour market, with higher virus infections and/or tighter restrictions once again a possibility. Nonetheless, our base case is that most of the upward pressure on wage growth will subside from mid-2022, underpinning our view that Bank Rate won’t need to rise as far as investors currently expect.

30 November 2021

UK Economics Update

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.

29 November 2021

More from Ruth Gregory

UK Economics Update

Farewell furlough

The impact on the labour market of the end of the furlough scheme could ultimately determine whether an interest rate hike comes in the next few months, or not until mid-2022. Our view remains that its expiry will help to ease the existing shortages and rates won’t rise until May 2022. But if this is not the case, we wouldn’t be too surprised if the Bank of England moved earlier, perhaps as soon as November.

30 September 2021

UK Data Response

GDP (Q2 Final)

Today’s release suggests the economy is closer to its pre-pandemic level than we had previously thought and raises the risk that the Bank of England hikes interest rates sooner than our forecast of May 2022.

30 September 2021

UK Economics Update

MPC getting closer to tightening policy

While rates were left at +0.10% in an 9-0 vote and the Bank of England’s target stock of purchased assets at £895bn, today’s Monetary Policy Committee (MPC) policy statement suggests that the Bank is moving closer to raising interest rates. As such, we now think that rates could rise in early 2022, rather than in 2023 as we had previously thought.

23 September 2021
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