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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

UK Data Response

Money & Credit (Oct.)

The rise in consumer credit in October adds to evidence that economic activity fared well at the start of Q4. But that no longer offers much comfort in light of the discovery of the new Omicron variant. While much remains uncertain, the risks to our (already subdued) GDP forecast appear to the downside.

29 November 2021

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 Update

Export woes not just a Brexit story

Brexit is undoubtedly a factor behind the slower post-pandemic recovery in UK exports relative to elsewhere. But doesn’t appear to be the sole reason. Instead, pandemic effects may explain at least some of the shortfall. That suggests some of the underperformance of UK exports may ease over the next couple of years as most of the impact of the pandemic fades.

24 November 2021

UK Data Response

IHS Markit/CIPS Flash PMIs (Nov.)

The composite activity PMIs hardly changed in November as the economy held up fairly well despite continued supply disruptions and shortages. Meanwhile, signs that price pressures continued to grow suggests that a hike to Bank Rate in December still looks like the most likely outcome.

23 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.

19 November 2021

UK Data Response

Retail Sales (Oct.)

The rebound in retail sales in October adds to the evidence that activity held up well in October and will raise expectations that the Bank of England will hike interest rates from 0.10% to 0.25% in December.

19 November 2021

UK Data Response

Public Finances (Oct.)

The winding down of the furlough scheme helped to bring down public sector net borrowing in October. But we doubt that the public finances will get much help from faster GDP growth in the near term.

19 November 2021

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