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Furlough fears fading, COVID-19 concerns climbing Even though the fallout after the furlough scheme was smaller and shorter than the Bank of England had feared, concerns over the deteriorating COVID-19 situation will probably prevent it from raising …
14th December 2021
The government’s recently-imposed “Plan B” COVID-19 restrictions mean there is a good chance that the economy contracted in December. If the pressure on the NHS increases, restrictions might be tightened further, implying substantial downside risks to Q1 …
10th December 2021
Touch-and-go whether economy grows or contracts in December The news that the economy was hardly growing at all before Omicron means it is touch-and-go whether it will grow a bit in December or shrink a bit. Against that background, we doubt the Bank of …
A hike this month does not look likely, but is possible Omicron is unlikely to prompt more QE or negative interest rates Lift off to occur early next year, but rates probably won’t rise as far as investors expect We wouldn’t completely rule it out, but we …
9th December 2021
While the emergence of the Omicron COVID-19 variant has increased the downside risks to our GDP forecasts, it has arguably increased the upside risks to our CPI inflation forecasts. The transmissibility, severity and capacity for Omicron to escape …
7th December 2021
Omicron is reducing socialising Just one week after the emergence of the Omicron COVID-19 variant there are lots of anecdotal reports of Christmas parties being cancelled and some tentative evidence that activity has softened. In the week before the …
3rd December 2021
The latest data suggest that the upward pressure on wage growth from labour shortages has a bit further to run. Admittedly, the discovery of the Omicron variant has clouded the near-term outlook for wages and the labour market, with higher virus …
30th November 2021
The restrictions announced by the government on Saturday in response to the new Omicron COVID-19 variant increase the downside risks to our GDP forecasts and the chances that the Bank of England delays increasing interest rates until next year. And …
29th November 2021
Omicron darkens the outlook for spending The rise in consumer credit in October adds to evidence that economic activity fared well at the start of Q4. But that no longer offers much comfort in light of the discovery of the new Omicron variant. While much …
For most of this week our Europe economics team have been re-evaluating their forecasts due to the prospect of more COVID-19 restrictions on the continent. We weren’t. That’s because a combination of higher infections since the summer, high vaccination …
26th November 2021
Brexit is undoubtedly a factor behind the slower post-pandemic recovery in UK exports relative to elsewhere. But it doesn’t appear to be the sole reason. Instead, pandemic effects may explain at least some of the shortfall. That suggests some of the …
24th November 2021
Signs of higher cost inflation add to Bank’s inflation concerns The composite activity PMIs hardly changed in November as the economy held up fairly well despite continued supply disruptions and shortages. Meanwhile, signs that price pressures continued …
23rd November 2021
Although the economic backdrop has recently become less favourable for UK asset prices, we expect that the economic recovery will regain some vigour in the second half of next year, that CPI inflation will fall close to the 2.0% target in late 2022 and …
22nd November 2021
“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
The extent of the shift in investors’ expectations of interest rates over the past month has been staggering. Investors are now pricing in an 80% chance of a hike to Bank Rate, from 0.10% to 0.25%, at the Monetary Policy Committee (MPC) meeting on 4 th …
22nd 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 …
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
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
