Some mild respite for businesses as last week’s data suggests some easing of price pressures. Energy crisis concerns are also at their lowest since Feb’22 when the war in Ukraine began. But consumers remain cautious, staying away from taking more debt or running down savings. Too bad, for those lucky enough to have accumulated some Covid savings, they’d be of real benefit to the economy. Thankfully, holiday spending in the final weeks of the year should spur some gains.
The UK economy is already struggling for traction but prominent voices in the Bank of England indicate a little bit more tightening in rates is on the way. As the holiday season approaches, some seasonal improvements in spending and hiring are likely. But these should not be mistaken as signs of a recovery. That, unfortunately, is still a long way off. But the UK is not alone in its woes. Waning economic momentum and high inflation are firmly problems shared.
Last week’s limelight was on Chancellor Hunt who delivered a much-awaited path for fiscal consolidation. While this should assuage financial market concerns and pressure on the BoE to tighten rates, households will be hit hard. Sure, the OBR seems optimistic about the pace of recovery but that won’t materialise anytime soon. Plus, energy bills will rise again in April. More tough times ahead.
Continue readingLast week UK became the only G7 country in which GDP fell in the third quarter, having never recovered to its pre-Covid peak. But there’s worse to come. Chancellor Hunt’s return to fiscal orthodoxy entails tax hikes and spending squeezes that will be delivered in the Autumn Statement this week. Tighter fiscal and monetary policy will continue to weigh on household spending. Hopefully there are measures on Thursday that help pave the way for a recovery.
Interest rates continue their march upwards. Last week the Bank of England joined the bandwagon of advanced economies in delivering a sizeable 75bps interest rate hike. Nonetheless, a recession seems inevitable next year. The key question of how deep it will be depends on impending changes to taxes and government spending, the level of energy prices and the willingness of households to use their excess savings. All remain to be seen.
This week’s interest rate decision from the Bank of England will be the first since the September “mini-budget” announcement unleashed a period of political and market turmoil. Markets and economists are counting on a 75 bps hike—the largest since 1989, and a quantum the ECB chose to adjust its benchmark rate just last week. But the real pain for the MPC is forecasting the economic and inflation outlook amid the current uncertainty around the new PM’s pending fiscal strategy.
Change is the only constant in the UK. We now know who the new Prime Minister will be, and the Conservatives appear determined to press ahead with a pivot back in the direction of fiscal orthodoxy (cue the upcoming October 31st fiscal plan). But much of the the damage to the economy has been done – interest rates have risen sharply and growth indicators are on the slide. Sleepless nights again for the Treasury and BoE?
All eyes today on the new chancellor. Since taking office last Friday, Jeremy Hunt is sparing no time in pacifying panic-stricken markets by undoing much of the controversial tax measures announced by his predecessor. This has already borne fruit—gilts and sterling rallied this morning. But this won’t completely fill the gap in public finances. Besides, the deteriorating growth outlook, continued real income squeeze and higher mortgage rates will weigh on the economy through next year.
Bank of England governor Andrew Bailey’s trip to the US for the annual IMF and World Bank meetings will not shield him from worries back home. The BoE is caught in the crossfire between raising rates to tame inflation and concerns that much higher mortgage rates would push the UK into a sharp downturn. Against this backdrop, every word Bailey and his colleagues utter will be closely scrutinised.
If Craig David was to put last week’s frenetic financial market activity to music, it would go something like this:
The pound slumped on a Monday
Took flak from the IMF on Tuesday
We saw BoE buying Gilts again on Wednesday
And on Thursday and Friday and Saturday
We chilled for a 45p tax U-turn on Sunday
