UK Markets

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 Data Response

GDP & International Trade (Aug.)

The 0.4% m/m rise in GDP in August confirms that the rapid gains in output, which in just 16 months lifted GDP from being 25.1% below its February 2020 pre-pandemic peak to 0.8% below, are now behind us. And shortages, including the petrol/energy crisis, may prevent GDP from rising much in the coming months. This weaker activity outlook may prevent the Bank of England from hiking interest rates this year.

13 October 2021

UK Economics Update

Labour shortages becoming worse and more widespread

Labour shortages seem to be worse and more widespread than we had expected. Although the end of the furlough scheme in late September may ease some of the shortages, we doubt it will plug all the holes. As such, we now think labour shortages are unlikely to ease significantly until at least the middle of next year. That adds to the downside risks to our GDP forecast and the upside risks to our inflation forecast.

12 October 2021

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

17 October 2021

Our view

Broadening product and labour shortages in the UK mean that the upside risks to inflation and the downsides risks to economic activity are greater than in most other economies. We think CPI inflation will rise from 3.2% in August to a peak of just above 4.7% around the turn of the year and that the economy will hardly grow at all in the coming months. The rise in some measures of inflation expectations mean that the Bank of England will probably raise interest rates in 2022. But we suspect that the weakening activity outlook will prompt the Bank to raise rates a bit later and slower than the increases from 0.10% to 0.75% priced into the financial markets for next year.

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Latest Outlook

UK Markets Outlook

Economy and policy to provide a bit less support

The recent downward revision to our GDP growth forecasts and the recent hawkish signs from the Bank of England which prompted us to bring forward our forecast of when monetary policy will be tightened means the economic backdrop is a bit less conducive towards rapid gains in risky assets than we previously thought. Admittedly, we still think that the economic recovery will be healthier than most forecasters expect and that the Bank of England won’t tighten policy until a year after the mid-2022 date assumed by the financial markets. As such, we still expect the FTSE 100 to gain some ground on the S&P 500 over the next couple of years. And we think that by rising only modestly from about 0.60% now to 1.25% by the end of 2023, 10-year gilt yields will increase by less than 10-year US Treasury yields.

9 August 2021