When it’s cold and dark, we naturally look forward to the warmth and light of festivities ahead. For the UK economy, we can with reasonable confidence anticipate some future vantage point from which we will be able to look back on the difficult recent period of inflation and monetary tightening. The next official statistics on inflation will likely show gradual progress. Confidence about other outcomes, though, notably long-term productivity growth and global decarbonisation, can feel more like a leap of faith.

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Updates last week from the Chancellor and the fiscal watchdog, the OBR, took a lot of digesting. As the Autumn Statement headlines and Thanksgiving sales fade away, for many of us the key financial figures to watch will be heating bills and Christmas shopping receipts. The big picture for the UK is an economy hobbling along under the shadow of high interest rates, though with a sense of relief that we have so far avoided a recession.

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On the UK economy, take your pick. Pessimists emphasise stagnation, high inflation, and a weakening labour market, while optimists see resilience, gradual disinflation and signs that monetary policy is working. But in the background is an uncomfortable feeling that we have grown used to low expectations. Headlines this week will likely announce a fall in inflation, boosting the national mood, but we will need further good news to feel confident of a better future.

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Having spent most of 2022 and 2023 hiking interest rates, the central banks in London, Washington and Frankfurt are now taking a breather and scanning the horizon. Uncertainties abound. How much of the impact of raising rates has materialised? How are workers, firms and consumers behaving? Monetary policymakers, having been wrong-footed by inflation, are keen to avoid appearing complacent. Talk of cutting rates is firmly dismissed, but markets expect cuts in 2024. Though inflation should ease, steering the economy could get even harder.

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While the US appears to be enjoying ‘immaculate disinflation’, moving beyond price pressures without suffering a recession, indicators in the UK are less encouraging. Business activity seems to be contracting and unemployment inching up. Pessimism could be premature, though. Statistical difficulties are making it harder to follow these developments, and the economy also has some positive stories to tell. The Bank of England interest rate decision and inflation forecast this week will help shape the mood as winter approaches.

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Inflation is still running at more than three times the 2% Bank of England target, interest rates are biting, and consumer confidence has fallen, perhaps in response to the emergence of new geopolitical turmoil. While there is optimism that inflation will decline in the months ahead, the Bank of England is watching closely for signs of domestically generated price pressures. And like the rest of us they nervously follow headlines from the Middle East.

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A disappointing week for UK economic data. Underlying momentum in GDP growth is modest, firm confidence about growth is diminishing, and high-frequency data show sluggish activity. While rates are biting for households and the housing market. Are we seeing those famous ‘long and variable lags’ in monetary policy affecting economic activity at work?

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Financial markets globally are taking in the “higher for longer” rhetoric. But non-market sentiment on the subject, be it economists or firm owners themselves, remain diverged. Firms’ expectations of prices and wage growth are coming down steadily. Further, the impact of already-announced rate hikes is just starting to be felt. Should it become apparent that the Bank of England has done too much, rate cuts may be upon us sooner than we expect.

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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. 

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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.

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