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UK Data Response

Consumer Prices (Jul.)

The encouraging evidence that the upward pressure on underlying inflation from global factors has started to ease will be of little comfort to the Bank of England given the signs that this is being replaced by more persistent domestic inflationary pressures. This increases the chances that the Bank of England will opt for a 50 basis point (bps) interest rate hike on 15th September, rather than 25bps.

17 August 2022

UK Data Response

Labour Market (Jun/Jul.)

June’s labour market figures revealed further evidence that the weaker economy is leading to a slightly less tight labour market. That said, by any metric the labour market is still exceptionally tight. And the robust rise in employment in June together with the leap in earnings growth will heap pressure on the Bank of England to raise interest rates by 50 basis points rather than 25 basis points at the next policy meeting on 15th September.

16 August 2022

UK Economics Weekly

Risk of a bigger and longer-lasting squeeze on real incomes

The prospect of a bigger rise in utility prices in October and in the first half of 2023 means the risks to our forecast for CPI inflation to rise from June's 40-year high of 9.4% to a peak of 12.5% in October are skewed to the upside. This increases the risk of a bigger and longer-lasting squeeze on households' real incomes and supports our view that consumer spending will be at the epicentre of a recession in 2022/23.  

12 August 2022

Key Forecasts

Main Economic & Market Forecasts

Latest

Q2 2022

Q3 2022

Q4 2022

Q1 2023

Q2 2023

Q3 2023

Q4 2023

2022

2023

2024

GDP (%q/q/y/y)

-0.1%(+2.9%)

-0.1%(+2.9%)

-0.2%(+1.7%)

-0.4%(+0.1%)

-0.1%(-0.8%)

+0.3%(-0.4%)

+0.4%(+0.2%)

+0.4%(+1.0%)

3.3

0.0

1.7

CPI Inflation (%)

(+9.4) Jun

9.2

10.3

12.4

11.5

8.4

6.5

2.9

9.6

7.2

1.5

Unemp Rate (%)

3.8% May

3.6

3.7

4.0

4.3

4.5

4.6

4.7

3.7

4.5

5.1

Bank Rate* (%)

1.75

1.25

2.00

2.50

2.75

3.00

3.00

3.00

2.50

3.00

2.50

QE Stock* (£bn)

863

865

855

840

830

815

765

750

840

750

665

10-yr Gilt* (%)

2.11

2.21

2.20

2.50

2.44

2.38

2.31

2.25

2.50

2.25

2.25

$/£*

1.22

1.21

1.19

1.18

1.20

1.22

1.23

1.25

1.18

1.25

1.30

€/£*

1.18

1.16

1.17

1.18

1.17

1.16

1.15

1.14

1.18

1.14

1.13

Sources: Capital Economics, Refinitiv. * End period.


Risk of a bigger and longer-lasting squeeze on real incomes

UK Economics Weekly

27 November 2022

Our view

Even though the UK economy is at risk of falling into a recession, the rise in CPI inflation to a 40-year high of 9.1% in May and other evidence that domestic price pressures are still strengthening support our view that the Bank of England will raise interest rates from 1.25% now to 3.00% next year. All this suggests that the prices of gilts and UK equities will fall further over the next year.

Latest Outlook

UK Economic Outlook

Soaring inflation to trigger a recession

A rise in CPI inflation from the 40-year high of 9.1% in May to a peak of 12% or higher in October will reduce real incomes by enough to mean that a recession now seems inevitable. Our forecast that real household disposable income will fall by more than 2% in both 2022 and 2023 would be the biggest decline on record and will surely prompt real consumer spending to fall. With the global factors that initially boosted inflation now being replaced by more persistent domestic inflationary forces, a recession is unlikely to reduce inflation to the 2% target on its own. As such, we think interest rates will be raised in a recession for the first time since 1975. Our forecast that the Bank of England will increase rates from 1.25% now to 3.00% next year envisages rates peaking much higher than the consensus forecast.

18 July 2022