It’s Bank of England decision time this week as the MPC will meet to set (and likely raise) Bank Rate. How are we placed currently? For one, the economic downturn is gathering steam. For another, businesses appear in no hurry to stop raising prices, even with energy prices coming down. But cost of living concerns remain entrenched. Difficult territory. And plenty for the Bank of England to ponder whether to bring its rate tightening cycle to an end.
Last year was tumultuous for the UK to say the least—from the cost-of-living crisis, to witnessing three PMs in a mere two months, to the end of the rule of its longest-reigning monarch, and rounding off the year with a recessionary threat clouding the outlook. And that was just at home. Globally, geopolitics loomed large in 2022, exerting a far greater influence and shaping the outlook in a way it hasn’t done in years. What does 2023 have in store?
It’s MPC week again. Although much of the turmoil that Bank of England had to grapple with in its November decision has now faded, it still faces a finely balanced decision. The UK has the worst growth outlook among the G7, its workforce is shrinking, buffeted by the impact of Long Covid, and inflation expectations have risen. While the festivities are masking some of this, fears over a post-Christmas slump are on the rise too.
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 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.
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.
