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The latest leap in wholesale gas prices means that we now think CPI inflation will rise from 10.1% in July to a peak of 14.5% in January (up from our previous forecast of a peak of 12.5% in October). But as it has become increasingly likely that the …
24th August 2022
One left-field option for alleviating Europe’s gas crisis that has been doing the rounds is the potential for asking Norway to discount the price of its gas exports. This Update looks at eight key questions on the topic. In short, an agreement would …
It’s clear in hindsight that the Bank of England kept monetary policy too loose for too long during the recovery from the pandemic. But that does not mean that the mandate given to it by the government requires change. In fact, making radical changes to …
23rd August 2022
Only a matter of time before PMIs point to a recession With the latest surge in wholesale gas prices set to intensify the cost of living crisis, it is probably only a matter of time before the activity PMIs start ringing the recession alarm bell. We think …
PMIs not pointing to a recession…yet Even though the S&P Global/CIPS composite flash PMI stayed above the no-change level of 50.0 in August, it probably won’t be long before it joins other indications suggesting that the economy is already in recession. …
Our existing forecast envisages 25 basis point (bps) hikes at the Bank of England’s September and November policy meetings. But given the data released over the past week, we now would not be at all surprised if the Bank were to deliver a second 50bps …
19th August 2022
Signs of consumer resilience, another borrowing overshoot We doubt the recent resilience in consumer spending will last for much longer. Even so, July’s rise in retail sales provides another reason to think that the Bank of England will raise interest …
Upward surprise will keep Bank of England in hawkish mode The encouraging evidence that the upward pressure on underlying inflation from global factors has started to ease will be of little comfort to the Bank of England given the signs that this is being …
17th August 2022
Jobs market still hot even as economy contracts 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 …
16th August 2022
Recent trends suggest that where US inflation goes, UK inflation follows. (See Chart 1.) So this week’s US inflation figures, which suggested that headline inflation in the US may have peaked, appears to offer some hope for the UK. Chart 1: CPI Inflation …
12th August 2022
Contraction in Q2 unlikely to be just a blip 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 …
We expect a recession in 2022/23 to be driven by high inflation, with a contraction in real consumer spending at its epicentre. But with household and corporate balance sheets still relatively healthy, we suspect the recession will be mild by historical …
11th August 2022
We’ve been warning for some time that CPI inflation would rise further than most people expect, triggering a recession. The prospect of even bigger rises in utility prices on 1 st October and in the first half of 2023 than we have pencilled in suggests …
10th August 2022
A rise in Bank Rate to a peak of 3.00% wouldn’t dent real consumer spending anywhere near as much as the drag from surging inflation over the coming quarters. That said, it would only compound the downward impact on spending, which reinforces our view …
9th August 2022
The Bank of England’s decision to step up the fight against high inflation by raising rates by 50 basis points (bps) from 1.25% to 1.75% was in line with our expectations. Moreover, we have been saying for some time that the UK economy would soon fall …
5th August 2022
While raising interest rates by 50 basis points (bps) today, from 1.25% to 1.75%, the Monetary Policy Committee (MPC) suggested that rates will probably have to rise further to knock on the head the recent rises in price/wage expectations, but that a …
4th August 2022
The fall in 10-year gilt yields from 2.60% in late June to 1.95% now has been in line with the global trend and shows that the markets are looking through the further near-term rises in inflation and interest rates and focussing more on the risks of …
29th July 2022
Given our forecast that the Bank of England will raise interest rates from 1.25% now to a peak of 3.00%, we still think that gilt yields have further to rise. However, with attention in the markets turning towards the prospect of lower inflation and …
Consumers borrowing more to cope with higher inflation The chunky increase in unsecured borrowing in June suggests that households are having to rely more on credit due to the cost of living crisis. But households won’t be able to fully offset the hit to …
MPC to raise rates by a bigger 50bps and to leave the door open to more 50bps hikes Our forecast that rates will peak at 3.00% remains higher than the consensus forecast of 2.00% Bank takes another step closer to gilt sales We expect the Monetary Policy …
28th July 2022
Who would have thought that one of the most noteworthy parts of the news on the UK economy this week would be the government’s debt interest payments on its index-linked gilts? But with the battle to become the next Prime Minister reaching its final …
22nd July 2022
Pipeline price pressures have peaked Spending on travel and leisure is supporting activity and has so far prevented the UK composite flash PMI from joining the euro-zone’s PMI in contraction territory. Perhaps even more encouraging was that price …
Higher prices dragging underlying sales volumes lower Although June’s retail sales figures were boosted in some areas by the extra Jubilee bank holiday and dragged down in others, the underlying trend is that the surge in prices is weighing on sales …
Borrowing overshoot will limit next PM’s ability to help households June’s public finances figures provided more evidence that the government’s fiscal position is worse than the Office for Budget Responsibility (OBR) predicted back in March. This may …
21st July 2022
Global pressures peaking, domestic pressures strengthening There are some encouraging signs that the upward pressure on underlying inflation from global factors has started to ease. But as it is being replaced by stronger upward pressure from domestic …
20th July 2022
Jobs market still hot even as the economy slows The strong rise in the supply of workers in May helped to take some of the heat out of the labour market. Even so, the sharp increase in employment and pick-up in wage growth supports our view that the Bank …
19th July 2022
The apparent race to the bottom on taxes slowed this week with the candidates that had pledged to loosen fiscal policy the most if they became Prime Minister either withdrawing from the contest or being eliminated in the first two rounds of voting by MPs. …
15th July 2022
Resilience unlikely to last The recent resilience of GDP to the drag from the high rate of inflation probably won’t last and there is still a big risk that the economy falls into recession. Even so, the surprisingly strong rise in GDP in May might …
13th July 2022
Weak economy may lead to looser fiscal policy There are two reasons why whoever fills Boris Johnson’s shoes as Prime Minister after his resignation this week is unlikely to significantly change the path of policy or the economy. First, all PM hopefuls …
8th July 2022
We suspect that the latest political turmoil in the UK adds to the reasons to expect a renewed rise in the 10-year Gilt yield, weakness in the pound, and continued trouble for the FTSE 100. The market reaction to the resignation of Boris Johnson as Prime …
7th July 2022
This Rapid Response was sent to clients immediately after the news early on 7 th July that the Prime Minister, Boris Johnson, planned to resign. The news that Boris Johnson plans to resign as UK Prime Minister later today may lead to fiscal policy being a …
Surveys of pricing intentions suggest that firms are confident of being able to both make recent price rises stick and to follow them up with further big increases over the next year. So the news that consumers have a slightly smaller savings buffer than …
1st July 2022
Households exercising more caution The more muted rise in unsecured borrowing in May suggests the cost of living crisis and recent plunge in consumer confidence are prompting households to exercise a bit more caution. That adds to reasons to think …
Households have a slightly smaller savings buffer The final Q1 GDP data leave households looking a bit more vulnerable to the big fall in real incomes that’s going to hit in Q2 and Q3. Although GDP and consumer spending won’t fall as far as real incomes, …
30th June 2022
Wage growth is a possible source of the “more persistent inflationary pressures” that the Bank of England has said would prompt it to act “forcefully” when raising interest rates. This Update highlights where to look for the early signs of either a …
29th June 2022
This week’s economic news didn’t appear to satisfy the criteria of “indications of more persistent inflationary pressures” that the Monetary Policy Committee (MPC) said last week would prompt it to act “forcefully”. As a result, market interest rate …
24th June 2022
Cost of living crisis bites harder The fall in retail sales in May suggests that the decline in households’ real incomes from surging inflation is starting to hit consumer spending a bit harder. Even so, consumer spending appears to be softening rather …
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 …
23rd June 2022
Activity holding up better than expected The fact that the composite PMI didn’t fall in June means the economy could be holding up a little better than we and the Bank of England had feared. Beneath the headline numbers, the survey also suggests strong …
Weaker economy will limit the Chancellor’s ability to help households The larger-than-expected rise in public borrowing in May is an early blow for the government on a day when it is expected to lose two by-elections. What’s more, the combination of a …
Probably not “persistent” enough to seal the deal on a 50bps rate hike 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 …
22nd June 2022
By cutting GDP growth by about 0.3-0.4 percentage points (ppts) in Q2 and raising GDP growth by a similar amount in Q3, the impact of the extra bank holiday to mark the Queen’s Platinum Jubilee will all come out in the wash in the end. But it will add …
21st June 2022
The US Fed’s move to raise rates by 75 basis points (bps) this week to 1.50-1.75%, and the 50bps rises by a handful of other central banks, has inevitably led to questions about why the Bank of England raised rates by “only” 25bps on Thursday to 1.25%. In …
17th June 2022
By raising interest rates by 25bps (basis points) today, from 1.00% to 1.25%, rather than by 50bps or the 75bps the Fed announced last night, we think the Bank of England is putting too much weight on the softening economy and not enough on surging …
16th June 2022
First signs of a less tight labour market The tentative evidence that the recent weakening in economic activity is filtering through into a slightly looser labour market may push the Bank of England a little closer to raising interest rates by 25bps …
14th June 2022
Bank may have to raise rates during a recession The 0.3% m/m fall in real GDP in April wasn’t as weak as it looks, but it nonetheless increases the chances that the economy is slipping into recession. While this is unlikely to prevent the Bank of England …
13th June 2022
As former Prime Minister Harold Wilson once said, “a week is a long time in politics”. At the start of the week the current Prime Minister, Boris Johnson, was fighting for his political life with 41% of his own MPs voting to remove him as leader of the …
10th June 2022
The markets and consensus are underestimating the chances of a 50bps rate hike It’s almost 50-50 between a 50bps and 25bps hike, but we’re going for 50bps Either way, recent events support our view that interest rates will rise to 3.00% next year The …
9th June 2022
Real economic growth is slowing rather than collapsing in the face of the twin drags of higher inflation and rising interest rates. The Chancellor’s latest fiscal handout will help support GDP in the second half of the year. And with the Prime Minister …
8th June 2022
This Rapid Response was sent to clients immediately after the results of the vote of confidence in Boris Johnson at 9.00pm BST on 6 th June 2022. After winning tonight’s confidence vote, the Prime Minister, Boris Johnson, may double down on Brexit and …
6th June 2022
