While the sell-off in financial markets over the past week or so has been abrupt, we don’t think that it currently poses a big threat to the economic outlook. The relationship between equity prices and GDP growth is not particularly strong, and the causality far from clear. And equities only account for a small share of households’ overall assets.
What’s more, we don’t think that the sell-off reflects a fundamental re-evaluation of the prospects for the UK economy. Note that the MPC actually revised up its forecasts for growth over the next few years. And the rise in interest rate expectations in the UK appear to be more a reflection of better news on the economy, rather than concerns about inflation, as appears to be the case in the US.
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