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“Given these two-sided risks – weaker activity and higher inflation – the labour market story really is the crucial part of it, and we haven’t yet seen enough of that story, post furlough scheme.” ”Don’t forget what our framework is. It’s about inflation. …
19th November 2021
Rebound in retail sales will give Bank of England confidence 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 …
Chancellor unlikely to get much more help from the economy, for now 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 …
Bank unlikely to ignore this leap in inflation When coupled with yesterday’s decent labour market release, the bigger-than-expected leap in CPI inflation in October makes an interest rate hike in December even more likely. That said, we still think the …
17th November 2021
Market remains tight after the end of furlough This labour market release is the first of two before the Bank of England’s December policy meeting and it suggests that the labour market remained tight after the furlough scheme ended. If the story is …
16th November 2021
On the face of it, the GDP data released this week suggest that the recovery is ticking along quite nicely. Indeed, the data showed that the economy picked up some pace at the end of Q3, providing a decent platform for the current quarter. (See here .) …
12th November 2021
With speculation rising that the UK will trigger Article 16 of the Northern Ireland Protocol, the big risk is that relations between the UK and the EU sour to such an extent that parts of the whole UK/EU Brexit deal unravel. Even if things do not …
11th November 2021
New-found momentum will soon fade The economy regained some momentum in September, but continued shortages and the drag on real incomes from higher utility prices probably mean it will soon fizzle out. That’s one reason why we doubt that the Bank of …
We’ve been warning for a while that CPI inflation would rise further than most people expect and have recently pushed our own forecast even higher. We now think CPI inflation will rise from 3.1% in September to 4.0% in October and to almost 5.0% in April …
10th November 2021
The divergence between the quarterly and the monthly measures of GDP have left it unclear whether the economy is still languishing at about 2.0% below its pre-pandemic level or if it is nearing that milestone. But regardless of how close the economy is to …
9th November 2021
Yesterday’s 1.5% weakening in the pound against the US dollar to $1.35 and the 20 basis point decline in 2-year gilt yields to 0.43% show that the markets are reassessing the Bank of England’s inflation fighting credentials. And who can blame them. At the …
5th November 2021
By leaving interest rates at 0.10% and continuing its QE asset purchases, the Monetary Policy Committee (MPC) didn’t set off any early fireworks today. But it did throw on the bonfire the markets’ expectations that interest rates will rise to 1.0% by the …
4th November 2021
The Chancellor’s new fiscal rules could help to convince voters and investors of the Conservative Party’s fiscal discipline. But with eleven rules having come and gone in the past seven years and with no less than nine new fiscal indicators unveiled in …
3rd November 2021
Two key points from the Budget Budget day produces a flurry of analysis but the most interesting reflections tend to come once the dust has settled and everyone has had time to digest the documents. Two points stand out to us. The first relates to the …
29th October 2021
Further signs of stagnating spending growth The tepid rise in consumer credit lends support to our view that economic growth slowed to little more than a crawl in September. Against the backdrop of rising COVID-19 cases and higher inflation, we expect …
Investors may be right that the MPC will hike rates in November or December But we think they are wrong to price in rates rising as far as 1.25% by end-2022 Our new forecast is for rates to rise to 0.50% by February, but no higher next year We now think …
28th October 2021
This Budget was perhaps more notable for what the Chancellor didn’t do rather than what he did. The OBR handed Rishi Sunak a significant upgrade to its forecasts for the public finances but, while the Chancellor spent some of the windfall a substantial …
27th October 2021
This checklist helps clients keep track of the key economic and public finances forecasts announced during the Chancellor’s Budget speech at 12.30pm on Wednesday 27 th October and to provide some instant context. We will send a Rapid Response and a Focus …
25th October 2021
Markets and monetary policy The markets easily shook off this week’s news that CPI inflation fell back in September, from 3.2% to 3.1%, and continued to price in some rapid rises interest rates. That makes sense when everyone knows that CPI inflation is …
22nd October 2021
Building price pressures raises chances of near-term interest rate hike The fifth consecutive fall in retail sales in September, together with signs that non-retail spending was also weak, supports our view that the economic recovery slowed to a crawl …
Despite the improving outlook for the public finances, the rumours that the Chancellor will set himself some fairly stringent fiscal rules suggest that there’s not going to be a net giveaway in the Budget and Spending Review on Wednesday 27 th October. …
21st October 2021
Good news for the Chancellor ahead of the Budget September’s public finances figures mean that the Chancellor will be able to boast in next Wednesday’s Budget that he has reduced government borrowing much quicker than expected. But we suspect he’ll set …
The lull before the storm The dip in CPI inflation in September feels a bit like the lull before the storm as we expect inflation to jump to close to 4.0% in October and to between 4.5% and 5.0% by April next year. As such, the fall in September probably …
20th October 2021
Overview – The UK economy is experiencing a taste of stagflation. This won’t be anywhere near as severe or as persistent as in the 1970s. But for the next six months, the worsening product and labour shortages will put the brakes on the economic recovery …
19th October 2021
There is an outside risk that the UK could face some limited short-term rationing of electricity this winter if weather conditions were to be unfavourable. This risk isn’t yet significant enough to factor into our forecasts. But if the supply of …
18th October 2021
Perhaps the most significant event of the past week came as markets opened on Monday morning. In response to two hawkish interviews by members of the Monetary Policy Committee (MPC) in the weekend papers – one by Governor Bailey and another by Michael …
15th October 2021
Shortages may now be biting harder 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, …
13th October 2021
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 …
12th October 2021
Tight market may tip MPC towards earlier rate hike The further strengthening of the labour market in August may prompt some members of the Monetary Policy Committee (MPC) to put more weight on the upside risks to inflation rather than the downside risks …
Truth be told, neither Boris Johnson’s nor Rishi Sunak’s speeches to the Conservative Party Conference this week contained anything new on the economic front. Instead, the most notable development came in an interview to the BBC in which PM Johnson …
8th October 2021
The recent sharp rise in public and market-based measures of inflation expectations has worried the Bank of England. Inflation expectations will probably rise further as actual inflation continues to climb. And if they rise by more than the increase in …
5th October 2021
Clouds are darkening over the outlook for the UK economy. A combination of broadening shortages, the fuel crisis, less fiscal support and the risk of higher interest rates will make it difficult for the UK economy to perform as well as its European peers. …
1st October 2021
The impact on the labour market of the end of the furlough scheme could ultimately determine whether an interest rate hike comes in the next few months, or not until mid-2022. Our view remains that its expiry will help to ease the existing shortages and …
30th September 2021
Less spare capacity raises risk of rate hike in the coming months Today’s release suggests the economy is closer to its pre-pandemic level than we had previously thought and raises the risk that the Bank of England hikes interest rates sooner than our …
Risk that the economy will take a small step back The tepid increase in consumer credit in August provides more evidence that the economy didn’t regain much momentum after stagnating in July. And with the current fuel crisis restraining activity (outside …
29th September 2021
The double whammy of higher utility prices and the government’s new “health and social care levy” will reduce real household disposable incomes over the next year or so by £16.5bn, or 0.6% of GDP, compared to otherwise. By slowing real consumption growth, …
28th September 2021
There are two reasons why we now think the Bank of England’s Monetary Policy Committee (MPC) will hike interest rates in 2022 rather than in 2023. First, underlying wage growth and inflation expectations have risen by more than we expected. These are …
24th September 2021
While rates were left at +0.10% in an 9-0 vote and the Bank of England’s target stock of purchased assets at £895bn, today’s Monetary Policy Committee (MPC) policy statement suggests that the Bank is moving closer to raising interest rates. As such, we …
23rd September 2021
Weaker activity and rising inflation may make life tricky for the MPC The small fall in the composite activity PMI in September indicates that the economy lost a little more momentum. But at the same time, there were clear signs that price pressures have …
Borrowing undershoot won’t stop the Chancellor unwinding the fiscal boost August’s public finances figures provided further evidence that the government’s financial position isn’t as bad as the Office for Budget Responsibility (OBR) predicted back in …
21st September 2021
On the back of the surge in inflation from 2.0% in July to 3.2% in August and the blistering increases in wholesale gas and electricity prices, investors are now pencilling in a rise in Bank Rate from 0.10% to 0.25% in Q1 2022 and to 0.50% at the start of …
17th September 2021
Given the recent surge in wholesale gas and electricity prices to record highs, it looks likely that Ofgem will opt for another chunky hike to the price cap on households’ utility bills next April. While this will hit household real incomes, it doesn’t …
Retailers struggle as households spend elsewhere The fourth consecutive fall in retail sales in August isn’t as bad as it looks as some of it reflects households spending more on non-retail items as life returns closer to normal. But as non-retail …
MPC’s position that interest rate hikes are on the horizon won’t have changed But the weak near-term growth outlook means that a rate rise is unlikely soon We think that Bank Rate will remain unchanged at 0.10% until 2023 The Monetary Policy Committee …
16th September 2021
A deeper dive into the CPI figures supports our initial analysis that the bulk of the jump in inflation from 2.0% in July to 3.2% in August is due to base effects linked to falling consumer prices in August last year rather than a widespread and …
15th September 2021
Climb in inflation towards 4.5% to be an uncomfortable ride for the MPC The leap in CPI inflation from 2.0% in July to a nine-year high of 3.2% in August (consensus 2.9%, CE 3.1%) is the first step in a rise that may take inflation to 4.5% or above by …
Labour market still tightening despite unwinding of the furlough scheme The latest data brought more signs that labour market slack is declining fast and that labour shortages are contributing to faster underlying pay growth. We suspect that beyond the …
14th September 2021
The stalling in the economic recovery in July doesn’t mean the recovery is over. But the 0.1% m/m rise in GDP in July revealed on Friday (see here ) does illustrate that the recovery has entered a slower and more challenging phase. To some extent this was …
10th September 2021
Virus cases and shortages stall the recovery The rise in COVID-19 cases and the product/labour shortages are probably behind the stalling in the UK’s economic recovery in July. With next week’s CPI release set to reveal a jump in inflation from 2.0% to …
