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.
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.