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The MPC and consensus still aren't downbeat enough on Q2 GDP; we look for a 0.7% quarter-on-quarter drop.
CPI inflation now looks set to approach 11% in October, driven by further huge rises in food and energy prices...
...But wage growth and inflation expectations haven’t risen, while producer price inflation now is set to plunge.
Households have not saved sufficiently less in Q2 to offset the hit to spending from the huge real income drop.
The high level of ad-hoc mortgage and unsecured debt repayments shows households remain cautious.
Households usually slash their saving rate when total financial wealth is growing quickly; it is barely rising now.
Retail sales volumes continued to decline in May in response to rapidly rising prices.
Consumer confidence deteriorated further in June, but retail sales should start to recover slowly soon...
Real disposable incomes will rise in Q3, thanks to Mr. Sunak’s grants; dis-saving and borrowing will help too.
Households still were unwilling to use their excess savings in April, despite the sharp drop in real incomes.
With excess savings equal to £186B and consumer credit £23B below its peak, consumers still can spend.
But low confidence, the unequal distribution of savings and falling incomes suggests expenditure will dip in Q2.
Mr. Sunak's measures will boost households' nominal incomes in H2 by 2% and nominal GDP by about 0.7%.
The medium-term impact, however, will be small, and the package is so timely the MPC can't feasibly offset it.
So the outlook for Bank Rate hasn't changed radically; we now expect it to rise to 1.50%, not 1.25%, this year.
The £15B support package is hefty, timely and targeted; it offsets most of October’s £24B energy bill rise.
The extra cash likely will lift GDP by 0.7% in the second half of this year; this matters for monetary policy.
Strikes will become more common over the coming months, but won’t tip the balance towards recession.
People are more likely to drain savings when they are glum due to inflation than when they fear redundancy.
April's recovery in retail sales suggests that households are prepared to defend their current real spending.
Recession risks likely will be further minimised by extra support from the government in the autumn.
Households must save less—or borrow more—to the tune of £9B in Q2, in order for real spending not to fall.
That is possible, given that "excess savings" are £186B and consumer credit is £25B below its peak.
But people didn't draw on savings in March and still are reluctant to borrow, so GDP looks set to dip in Q2.
The near-term outlook for households' real disposable income looks bleak; we still expect GDP to drop in Q2.
A recession, however, isn't our base case; people have ample scope to draw on savings and to borrow more.
We now Bank Rate to top out at 1.25% this year, not 1.00%, but still think markets have lost the plot.
The two-year fixed 75% LTV mortgage rate leapt by 35bp to 2.11% in March; it is set to rise to 2.7% by Q4.
The current tight spread between mortgage rates and risk-free rates is unsustainable; deposit rates will rise too.
Most refinancers will cope, but the rise in new rates will be severe enough to slow house price growth.
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