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UK Markets

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*

%q/q(%y/y) unless stated

Latest

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Q4 2021

2020

2021

2022

GDP

+16.0(-8.6) Q3

+16.0(-8.6)

-3.1(-11.5)

-3.5(-11.9)

+6.0(+14.9)

+7.2(+6.2)

+1.7(+11.5)

(-10.8)

(+4.5)

(+8.8)

CPI inflation

(+0.3) (Nov)

(+0.6)

(+0.5)

(+0.6)

(+1.6)

(+1.7)

(+2.1)

(+0.9)

(+1.5)

(+1.7)

ILO unemployment rate (%)

4.9 (Oct)

4.8

5.2

5.5

5.9

6.5

6.5

4.5

6.1

5.6

Bank rate, end period (%)

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

0.10

10 yr gilt, end period (%)

0.29

0.25

0.24

0.30

0.35

0.40

0.50

0.24

0.50

0.50

$/£, end period

1.36

1.29

1.35

1.37

1.38

1.39

1.40

1.35

1.40

1.45

Euro/£, end period

1.11

1.14

1.13

1.12

1.12

1.12

1.12

1.13

1.12

1.12

Sources: Capital Economics, Refinitiv

* Assumes that severe COVID-19 restrictions are in place during January and February and that restrictions are eased very gradually in March, April, May and June. (See here.)


When will vaccines unlock the economy?

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 9.0% in April 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 Markets Outlook

Stagflation stalking the markets

If we are right in expecting inflationary pressure to stay strong even as the economy gets dangerously close to a recession, then the prices of gilts and UK equities will probably fall further over the next year. Our forecast that the Bank of England will raise interest rates from 1.00% now to 3.00% next year would take rates above the peak of 2.50% priced into the markets and would therefore suggest that 10-year gilt yields will rise further than widely expected (perhaps from 1.90% to 3.00%) and that the FTSE 100 will fall further (perhaps from 7,500 to 6,800). The risk is that an even weaker economy prompts equity prices to fall further. And with inflation high, the markets can’t rely on the Bank of England to provide any relief.

26 May 2022