Stronger data keeps August hike on the cards

Economic growth of 0.4% or so in Q2 – as suggested by the latest business surveys – would normally be pretty respectable. But coming after Q1’s snow-related slowdown, it looks a little soft. What’s more, if growth has been boosted by some “catch-up” after the snow, then the economy might not carry even this lacklustre pace into the second half of 2018. Nonetheless, there have been a number of developments over the past month that have indicated that the fundamental drivers of economic growth have improved. After all, sustained rises in real pay now appear to be in prospect. And we don’t see why the manufacturing sector shouldn’t continue to provide welcome support to GDP growth this year. As such, although the near-term interest rate outlook still looks finely balanced, our feeling is that the chances of an August hike remain a bit above 50%.
Continue reading

More from UK

UK Data Response

Public Finances (Sep.)

September’s public finances figures mean that the Chancellor will be able to boast in next Wednesday’s Budget that he has reduced government borrowing much quicker than expected. But we suspect he’ll set himself some tight fiscal rules that will mean he won’t announce a major net giveaway next week.

21 October 2021

UK Data Response

Consumer Prices (Sep.)

The dip in CPI inflation in September feels a bit like the lull before the storm as we expect inflation to jump to close to 4.0% in October and to between 4.5% and 5.0% by April next year. As such, the fall in September probably won’t deter the Bank of England from raising interest rates from 0.10% in the coming months, although we think the markets have gone too far by pricing in rates rising to 1.00% next year.

20 October 2021

UK Economic Outlook

A taste of stagflation

The UK economy is experiencing a taste of stagflation. This won’t be anywhere near as severe or as persistent as in the 1970s. But for the next six months, the worsening product and labour shortages will put the brakes on the economic recovery at the same time as higher energy prices drive up CPI inflation from 3.2% in August to a peak of around 5.0% in April next year. The Bank of England’s growing fear that some of this rise in inflation is becoming embedded within wage growth and inflation expectations means it is on the cusp of raising interest rates from 0.10% for the first time since the pandemic. The markets have priced in increases in interest rates to over 1.00% by the end of next year. Our forecast that economic activity will be weaker than the Bank expects over the next six months and that CPI inflation will fall back to the 2% target in late 2022 and in 2023 suggests that interest rates won’t rise that far that fast.

19 October 2021

More from Capital Economics Economist

US Economics Weekly

Stronger growth not generating major imbalances

After the Fed’s decision to raise interest rates by another 25bp, Fed Chair Jerome Powell claimed in the post-meeting press conference that “the economy is doing very well” – we couldn’t agree more. That view was bolstered by May’s retail sales figures, which suggested that both consumption and GDP growth will rebound strongly in the second quarter, to above 4% annualised. The Fed’s financial account data, released last Friday, illustrate that the economic expansion is not being accompanied by a sharp rise in private sector debt. Rising household wealth is prompting households to save less of their incomes and firms have plenty of resources to fund investment, not least thanks to the 2017 tax reform. The main vulnerability is a renewed surge in Federal debt, but even that wasn’t as bad as it looked, because it was boosted by the suspension of the debt ceiling and partly matched by a rise in assets held in the Treasury account at the Fed.

15 June 2018

Commodities Weekly Wrap

Fears of protectionism weigh on prices

The Fed’s decision to hike its target rate by 25bp and the announcement that the US was going to press ahead with a 25% tariff on imports of Chinese goods prompted a rally in the dollar, which in turn weighed on commodity prices. China has already said it will retaliate, notably with a 25% tariff on soybeans, which was a key factor in the 4% slump in their price this week. Softer Chinese activity data for May, released on Thursday, also worried investors, particularly in the industrial metals markets.

15 June 2018

Canada Economics Weekly

Household debt will remain a risk for years to come

The news earlier this week that household debt had edged down to 168.0% of disposable incomes in the first quarter, from 169.7% in the final quarter of last year, was greeted by some as confirmation that the Bank of Canada had somehow engineered a soft landing in the housing market. It hasn’t. Debt usually surges in the fourth quarter ahead of the Holiday season and falls back in the first quarter, as people pay down their credit cards. Moreover, by focusing on debt exclusively, those commentators also conveniently failed to note that overall household net worth declined to a two-year low of 857% of disposable income.

15 June 2018
↑ Back to top