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Economy will give the next PM a rough ride

The next Prime Minister may walk into 10 Downing Street while the economy is in the middle of a recession and just a month before a rise in CPI inflation to over 10% in October marks the worse point of the cost of living crisis. That’s why one of their first tasks will probably be to oversee a loosening in fiscal policy that heightens the economy’s inflation headache. Meanwhile, the latest data and some speeches by MPC members suggest that the Bank of England may have edged a bit closer to administering a 50 basis point hike in interest rates in August rather than a 25 basis point hike.
Paul Dales Chief UK Economist
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UK Data Response

Labour Market (Jun/Jul.)

June’s labour market figures revealed further evidence that the weaker economy is leading to a slightly less tight labour market. That said, by any metric the labour market is still exceptionally tight. And the robust rise in employment in June together with the leap in earnings growth will heap pressure on the Bank of England to raise interest rates by 50 basis points rather than 25 basis points at the next policy meeting on 15th September.

16 August 2022

UK Economics Weekly

Risk of a bigger and longer-lasting squeeze on real incomes

The prospect of a bigger rise in utility prices in October and in the first half of 2023 means the risks to our forecast for CPI inflation to rise from June's 40-year high of 9.4% to a peak of 12.5% in October are skewed to the upside. This increases the risk of a bigger and longer-lasting squeeze on households' real incomes and supports our view that consumer spending will be at the epicentre of a recession in 2022/23.  

12 August 2022

UK Data Response

GDP (Jun. & Q2)

The 0.6% m/m drop in GDP in June was mostly due to the adverse effect of the extra Jubilee bank holiday. Even so, the GDP figures confirmed that the economy contracted by 0.1% q/q in Q2 as a whole and we have not altered our view that a recession is on the way later this year.

12 August 2022

More from Paul Dales

UK Economics Weekly

Too soon to conclude inflation won’t become more persistent

It’s too soon to conclude that the weak tone of this week’s news on activity means that inflation won’t become more persistent. Our proprietary measure of underlying/persistent CPI inflation rose to a new record high in May. And the flurry of higher pay settlements across the economy suggests that high inflation is feeding into faster wage growth. This may not necessarily be enough to prompt the Bank of England to start raising interest rates in 50 basis point steps. But we still think that rates will need to rise from 1.25% to 3.00% to tame inflation.

24 June 2022

UK Markets Chart Book

Gilts to struggle sooner, equities to struggle for longer

We haven’t changed our forecast that the Bank of England will raise interest rates from 1.25% now to a peak of 3.00% by the middle of next year. But we do now think that a number of other central banks will raise interest rates faster and to higher levels to try and get on top of inflation. As a result of these global factors, we now think that 10-year gilt yields will rise from 2.35% currently to a peak of 3.00% by the end of this year rather than to 3.00% by the middle of next year. We also think the FTSE 100 will fall from 7,050 now to a trough of around 6,600 by the end of next year (rather than to a low of 6,800 by the middle of next year). In other words, rises in global interest rates and the toll they will take on activity will result in the prices of gilts falling faster and UK equity prices falling further and for longer.

23 June 2022

UK Data Response

Consumer Prices (May)

The further rise in CPI inflation from 9.0% in April to a new 40-year high of 9.1% in May won’t prevent the Bank of England from raising interest rates further, but it may encourage it to opt again for a 25 basis point (bps) rate hike at its next meeting in August rather than upping the ante with a 50bps hike.

22 June 2022
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