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PMIs point more firmly to recession The decline in the composite flash PMI to 47.2 in October took it further below the boom-bust level of 50.0, placing it deeper into contraction territory. This is consistent with recent data that suggests the economy …
24th October 2022
PMIs point more firmly to recession The decline in the composite flash PMI to 47.2 in October took it further below the boom-bust level of 50.0, placing it deeper into contraction territory, and sits with recent data that suggests the economy is heading …
We do not yet know which of the three PM hopefuls (Boris Johnson, Rishi Sunak, Penny Mordaunt who have attracted early backing from Conservative MPs) will replace Liz Truss. The candidates that gain more than 100 nominations from MPs will be whittled …
21st October 2022
Fiscal tightening on its way as next PM has to work hard to restore credibility The weakness in retail sales and overshoot of the Office for Budget Responsibility’s (OBR) March public borrowing forecast won’t make the next Prime Minister’s task any …
Fiscal tightening on its way as next PM has to work hard to restore credibility The weakness in retail sales and further overshoot of the OBR’s March public borrowing forecast won’t make the next Prime Minister’s task any easier in navigating the economy …
Although the extra risk premia on the UK’s sovereign bonds and currency that emerged in the wake of the UK’s “mini”-budget have partly unwound, this doesn’t necessarily mean Gilts and sterling are set to return to where they were before Liz Truss’s …
20th October 2022
While the UK government’s apparent U-turn on fiscal policy offers some hope of relief for sterling, we think the outlook remains precarious. We continue to expect that sterling will lose further ground against the US dollar in the near term. But while …
New Prime Minister will have to work hard to restore credibility Although the resignation of Liz Truss as Prime Minister leaves the UK without a leader when it faces huge economic, fiscal and financial market challenges, the markets appear to be relieved. …
As the new Chancellor, Jeremy Hunt, unveils whether, when and how he will put public debt on a sustainable path in his Medium-Term Fiscal Plan on Monday 31 st October, the big question will be whether his actions will be enough to restore credibility …
The UK property market has a long history of either causing or worsening recessions. But that history has taught both banks and regulators a lesson. So while higher debt payments, falling property prices and a slump in construction will play a major …
19th October 2022
Underlying inflation strengthening despite weaker outlook The further strengthening in domestic price pressures despite the clear weakening in the economic outlook supports our view that the Bank of England will raise interest rates by 100 basis points, …
Underlying inflation still strengthening despite weakening economy The rebound in CPI inflation, from 9.9% in August to 10.1% in September (consensus 10.0%, CE 10.2%), lends some support to our view that the Bank of England will raise interest rates by …
Fiscal uncertainty reduced, but inflation may be higher for longer The Chancellor didn’t just do a further U-turn on the Truss/Kwarteng policies in his statement today, he essentially wiped them out in an attempt to reassure the financial markets that the …
17th October 2022
“Dear, oh dear”. King Charles neatly summed up the thoughts of the nation with those three words when he greeted the Prime Minister, Liz Truss, on Wednesday for their weekly meeting. The big question is who will the King be greeting next week? Will it be …
14th October 2022
Government still has a lot more to do to restore credibility Today’s sacking of the Chancellor and reversal of more of the tax cuts included in the mini-budget creates some downside risks to our forecast that interest rates will rise from 2.25% to 5.00% …
Economy contracts as markets fret The contraction in real GDP in August won’t ease the jitters in the financial markets at a time when the recent behaviour of politicians and the words of the Governor of the Bank of England are making the markets …
12th October 2022
Economy losing more momentum as the markets fret The 0.3% m/m fall in GDP in August (consensus and CE 0.0%) won’t ease the jitters in the financial markets at a time when the recent behaviour of politicians and the words of the Governor of the Bank of …
Central banks have the tools to deal with liquidity crises arising from rising interest rates and falling asset prices. Instead, the bigger threat is that higher interest rates produce large and simultaneous falls in asset prices that threaten the …
11th October 2022
Note: This report has been updated in the 6th paragraph to reflect 11th Oct. comments from BoE Governor Andrew Bailey. Given that the surge in gilt yields that has forced the Bank of England to intervene in the market was initially driven by the …
Labour market won’t make the Bank of England’s task any easier While there were tentative signs that the labour market is cooling from the red-hot conditions seen in recent months, the shortfall in labour supply is keeping it exceptionally tight. That …
Labour market won't make the Bank of England's task any easier While there were tentative signs that the labour market is cooling from the red-hot conditions seen in recent months, the shortfall in labour supply is keeping it exceptionally tight. That …
The Prime Minister, the Chancellor and investors will probably all be breathing a huge sigh of relief today as there was no guarantee that they would end the week in the same positions as they started it. But the lesson from the past couple of weeks is …
7th October 2022
If interest rates rise from 2.25% to 5.00%, as we now expect, we think the economy will suffer a deeper recession involving a 2% peak-to-trough fall in real GDP. That may result in the unemployment rate rising from 3.6% in July to 5.5% and may …
5th October 2022
The government-induced turmoil in the markets this week has altered our thinking in five key ways. First, we have raised our forecast for the peak in interest rates from 4.00% to 5.00%. At the end of last week, we had thought that the tax cuts announced …
30th September 2022
If the UK government’s “new era of fiscal policy” boosts GDP growth as planned, the UK’s long-term prospects will be much improved. But the action announced so far will not achieve this. It is even possible that, by denting the UK’s fiscal credibility, …
Looser fiscal policy to send cost of borrowing soaring The surge in interest rate expectations since the Chancellor’s “mini-budget” will sharply raise the cost of borrowing in the economy. We now expect Bank rate to reach a peak of 5.00% which will push …
Looser fiscal policy to send cost of borrowing soaring August’s money and credit figures suggest that in August consumers were starting to adjust their borrowing and savings behaviour in response to higher inflation. The £1.1bn rise in consumer credit …
Smaller economy a blow to Chancellor’s fiscal plans The good news is that the economy is not already in recession. The bad news is that contrary to previous thinking, it still hasn’t returned to pre-pandemic levels. It’s the only G7 economy in that …
Smaller economy makes Chancellor’s fiscal plans look even more untenable The good news is that the economy is not already in recession. The bad news is that contrary to previous thinking, it still hasn’t returned to pre-pandemic levels. It’s the only …
The Bank of England appears to have prevented the financial market fallout from the loose fiscal plans revealed in the Chancellor’s mini-budget from escalating into a full financial crisis. Since it committed to buy £65bn of long-dated gilts on …
29th September 2022
Mini-budget forces BoE to step in to prevent financial crisis The continued fallout this morning from the Chancellor’s mini-budget has forced the Bank of England to step in to avoid the early stages of a financial crisis. It has postponed its plan to sell …
28th September 2022
In response to the government’s loose fiscal plans and the resulting weakening in the pound, we now think that interest rates will rise from 2.25% now to a peak of 5.00% (4.00% previously). Rates at those levels make the housing market look very …
27th September 2022
The rise in market interest rates that has already happened will push up mortgage rates to at least 6% and reduce the size of loans that lenders can offer. The resulting drop in buying power makes a significant drop in house prices inevitable. Many …
Long-term fiscal sustainability is governed by what happens to a combination of economic growth, government borrowing costs and the primary budget balance. Since we’re sceptical that the tax cuts announced by Kwasi Kwarteng last week will boost …
Investors have revised up how far they expect the Bank of England to raise interest rates as they continue to digest the tax cuts announced on Friday. This Update examines what the impact on the housing market would be, and whether that could prevent …
Govt and BoE do the bare minimum, markets may yet force the issue It remains to be seen whether today’s statement by the government and the Bank of England will be enough to ease the markets’ fears about the government’s fiscal policy. The initial …
26th September 2022
BoE needs to get on front foot with big rate hike The further fall in the pound in early trading means that we’ve now reached the point where the Bank of England needs to step in in order to regain the initiative. There are a couple of ways it could do …
The financial markets delivered their verdict on Chancellor Kwasi Kwarteng’s “Growth Plan” immediately after it was revealed Friday morning. There was carnage in the gilt market with 2-year yields rising by over 40 basis points (bps) to 3.95% (the …
23rd September 2022
The Chancellor claimed that this was a plan for growth. But unless the Chancellor’s gamble pays off and the government’s fiscal policy boosts GDP growth by 0.5-1.0ppts per annum, the risk is that once the near-term boost to GDP fades, the legacy of the …
PMIs pointing to a recession The slip in the composite flash PMI to 48.4 in September took it further below the boom-bust level of 50 and sits comfortably with recent data that suggests the economy is already in a recession. That’s hardly a good start …
Chancellor gambles everything on growth The Chancellor claimed that this was a budget for growth. But unless the Chancellor’s gamble pays off and the government’s fiscal policy boosts GDP growth by 0.5-1.0ppts per annum, the risk is that once the …
The hawkish 50 basis point (bps) hike in interest rates today, from 1.75% to 2.25%, was partly driven by the government’s plans to dramatically loosen fiscal policy and supports our view that the Bank of England will raise rates to a peak of 4.00% and …
22nd September 2022
Govt’s fiscal plans to force the Bank to raise rates to 4.00% The 50 basis point (bps) rise in interest rates today was partly driven by the government’s extraordinary fiscal plans that are expected to be confirmed in a not-so-mini-budget tomorrow. It’s …
A key prong to the new PM’s economic policy is to increase the size of the economic pie, rather than redistributing it, seemingly funded by higher public borrowing. If the new government’s gamble on GDP growth pays off and it hits its 2.5% real GDP growth …
21st September 2022
Fiscal stimulus will put borrowing back on upward trend The public finances figures brought some cheer for the new Chancellor, Kwasi Kwarteng, ahead of his fiscal statement on Friday. That said, the government’s huge fiscal expansion and the weakening …
Borrowing trend still worrying, despite recent improvement The public finances figures brought some cheer for the new Chancellor, Kwasi Kwarteng, after the run of fairly poor outturns seen so far this fiscal year. That said, the government’s big fiscal …
According to media reports, in his mini-Budget slated for Friday 23 rd September, the new Chancellor, Kwasi Kwarteng, intends to officially set a target of real GDP growth of 2.5% a year. At first glance, 2.5% economic growth would appear to be within …
16th September 2022
Downward momentum gathering pace The weakness in August’s retail sales volumes figures suggests that the downward momentum is gathering speed and supports our view that the economy in already in a recession. But that won’t stop the Bank of England from …
Downward momentum gathering The 1.6% m/m drop in retail sales volumes in August (consensus -0.5%, CE -2.0%) supports our view that the economy is already in recession. Retail sales will probably continue to struggle as the cost of living crisis hits …