The limelight last week was shared by the Bank of England and the Chancellor. The former delivered another 50-point rate hike trying to stem a runaway inflation. The latter sought to add some oil into the fire, with a huge set of tax cuts. But the market’s verdict was not generous. The pound tumbled to a record low of $1.035 and the gilt market on Friday had its worst day since the early 1990s.
Last week saw an avalanche of data releases. A mixed picture indeed. On the one hand, GDP growth petered out and other activity indicators deteriorated. On the other, inflation eased a notch, whilst the labour market remains tight. How will the Bank of England react? We shall find out this week!
To say that the past 70 years have seen some significant economic change would be a profound understatement. In 1952, one in three in the UK worked in manufacturing, it’s now one in 12. Almost 5% of folk worked in agriculture, less than 1% do now. The UK was the world’s third largest economy in 1952, behind only the US and the USSR, accounting for 10% of global merchandise goods trade. It’s around a quarter of that now. In 1952 women only accounted for under a quarter of first degrees, they now account for a majority. And for 60% of higher degrees. While female employment rates are up by a third. Transformations elsewhere were in abundance – from the ‘trente glorieuses’ of our European peers, Japan’s post-War miracle, the Asian tigers, and the rise of China and India. Condolences to everyone in the Royal Family. We have witnessed the end of an era, and pay tribute to someone who contributed, in no small part, to economic history.
The countdown for the energy cap hike has begun. Amidst rising price pressures consumers are adjusting their behaviour, borrowing more, while businesses are easing up on hiring. But the impending strain will outlast winter, making government support even more urgent. Elsewhere, things don’t look any better. The Eurozone continues to grapple with soaring inflation while growth momentum remains lukewarm in China.
An economic slowdown is becoming more and more apparent in the UK and elsewhere. PMIs, business surveys and other high frequency real-time indicators all point to it. In the UK consumers are tightening their purse strings as they brace for exorbitant energy bills. Forecasters can’t revise their inflation numbers fast enough to keep pace with wholesale gas prices! The size and shape of policy support takes on greater significance with each passing day.
Last week’s showstopper was inflation which hit double digits for the first time in 40 years. Previously latent concerns are also coming to the fore, like a cooling labour market, zero productivity gains, and waning consumer confidence. Recent policy support will only temporarily assuage spending before an energy price cap increase in October renews stress.
Central bankers are raising rates at the fastest pace since 1980s, with the Fed last week raising rates by 0.75 ppts. Will the Bank of England follow suit on Thursday? Members will need to navigate a tight trade-off between growth and inflation. Given the latter remains at eye-watering levels, a rate hike is very much on the cards. However, the question remains whether the BoE will stick to a gradual approach or will step up the pace of its tightening cycle following the lead of other central banks.
At this point upside surprises in inflation rate occur with such frequency that “surprise” is probably the wrong word for them. Inflation in the UK rose for a ninth month in a row in June and was the highest among G7 countries, while with another hefty rise in the energy price cap to come, the inflation peak is still some way off. Meanwhile PMI data across the UK, Eurozone and US all point to slowing growth momentum.
The UK reported better than expected growth in May. However, the elephant in the room is stubborn inflation. Americans are already feeling the heat, as inflation hit a fresh 40-year high last week. Surging price pressures and a darkening economic outlook for Europe is helping drive down the value of the euro, which briefly touched parity with the dollar for the first time in 20 years. Meanwhile the Bank of England is signal rate hikes might quicken!