Last week’s upbeat revisions to the UK’s economic performance in the first half of the year, whilst encouraging, brings little joy, as the impact of high interest rates on the economy continues to build. With the cost of credit rising, this is the best time for many households to rebuild their depleted savings. Mix in some election uncertainty and businesses too will likely postpone their investment decisions. All combined, it’ll keep growth subdued.
Policy tightening across the globe is nearing its end. The Bank of England (BoE) and Federal Reserve (Fed) paused their respective rates hiking cycles last week, while the ECB signalled a final hike the week prior. At home, the vote was rather close, 5-4, and the MPC’s guidance suggested they are maintaining optionality about future hikes. Globally, the prolonged monetary tightening phase has constrained the growth outlook for this year and next.
So far the Bank of England’s rate hiking cycle had been made somewhat easy by the UK’s strong economic performance. But MPC members perhaps shifted in their chairs as last week’s data releases told a story of fading economic momentum and a cooling labour market. However, wage pressures remain intact, and inflation expectations have edged up. Oil’s been on an upward march of late, feeding higher prices at the pump: petrol’s at its highest level since last December. Lots to ponder ahead of Thursday’s rate decision.
While the eye of the cost-of-living storm may have passed, the impact is continuing to be felt. Household spending appetite is moderating. Businesses are also turning cautious amid rising rates, holding back on major investment and staffing decisions. With the direction of policy still uncertain, this week’s GDP and labour market releases will be crucial indicators of the next move.
The heat continues to come out of the UK economy. Lending is tepid and the housing market is subdued. Meanwhile the labour market also continues to cool, suggesting that the Bank of England’s rate tightening is nearing its end. Things are not too different in the Eurozone and US, while China grapples with faltering growth.
Continue readingThe story of the UK’s economic resilience of 2023 is being put to the test – the impact of all those hikes in interest rates may just be beginning to more obviously weigh on growth, according to the latest PMI suveys. The situation is little better elsewhere, with the eurozone in particular exhibiting signs of weakening economic momentum.
Last week’s wage growth and inflation figures suggests that while most battles may be won, the war against inflation is not yet over. But with summer coming to an end and momentum in the economy seemingly fading, there is less wiggle room for the Bank of England, and the trade off between growth and price stability is likely to become trickier.
Continue readingThe UK economy ended the first half of the year on a positive note, performing better than expected. Consumer spending and business investment picked up in the second quarter and firms were resilient to industrial action. Whether this will be the start of a steady recovery, or if the cheer will prove short lived, as higher rates bite, remains to be seen.
The MPC delivered the expected rate hike last week, even if the committee itself was far from unanimous. There’s more agreement on the outlook however — muted growth, gradually increasing labour market slack, and continued disinflation are still the prediction.
There was some respite for the UK economy last week, with headline and core inflation falling in June. The news around broader economic activity was slightly less cheery, even if retail sales held up. It seems the private sector’s recovery is losing steam. Enough to limit the Bank of England to a 25bps rise next week, rather than 50?
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