UK Markets

UK Data Response

Labour Market (Nov./Dec.)

The labour market appears to have tightened after the end of the furlough scheme and at the start of the Omicron wave. So even though real wages are now falling and will decline further, we still expect the Bank of England to raise interest rates from 0.25% to 0.50% on 3rd February and to 1.25% by December.

18 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 Data Response

GDP & International Trade (Nov.)

Although the effects of the Omicron COVID-19 wave will probably mean that the economy falls back below its pre-pandemic peak by January after having surpassed it for the first time in November, that will probably prove to be a temporary setback. That said, a sharp rise in taxes and utility prices on 1st April will be a drag on the recovery for the rest of this year.

14 January 2022

Most Recent Alerts

5 hours ago

UK Data Response

Labour Market (Nov./Dec.)

Key Forecasts

Main Economic & Market Forecasts*

%q/q(%y/y) unless stated

Latest

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

2020

2021

2022

GDP

+16.0(-8.6) Q3

+16.0(-8.6)

-3.1(-11.5)

-3.5(-11.9)

+6.0(+14.9)

+7.2(+6.2)

+1.7(+11.5)

(-10.8)

(+4.5)

(+8.8)

CPI inflation

(+0.3) (Nov)

(+0.6)

(+0.5)

(+0.6)

(+1.6)

(+1.7)

(+2.1)

(+0.9)

(+1.5)

(+1.7)

ILO unemployment rate (%)

4.9 (Oct)

4.8

5.2

5.5

5.9

6.5

6.5

4.5

6.1

5.6

Bank rate, end period (%)

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

10 yr gilt, end period (%)

0.29

0.25

0.24

0.30

0.35

0.40

0.50

0.24

0.50

0.50

$/£, end period

1.36

1.29

1.35

1.37

1.38

1.39

1.40

1.35

1.40

1.45

Euro/£, end period

1.11

1.14

1.13

1.12

1.12

1.12

1.12

1.13

1.12

1.12

Sources: Capital Economics, Refinitiv

* Assumes that severe COVID-19 restrictions are in place during January and February and that restrictions are eased very gradually in March, April, May and June. (See here.)


When will vaccines unlock the economy?

UK Economics Weekly

18 January 2022

Our view

Our forecasts envisage CPI inflation rising further than most expect to a peak of 7% and the Bank of England raising interest rates quicker, from 0.25% now to 1.25% by the end of the year. COVID-19 has the capacity to spring more surprises. But the main macro risk is that CPI inflation stays above the 2% target for longer and that the Bank of England raises interest rates above 1.25% in 2023.

Latest Outlook

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