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House purchase demand is falling quickly in response to the jump in mortgage rates and drop in real incomes.
New mortgage rates look set to rise further in Q3, greatly weighing on approvals.
A contraction in supply, however, will prevent a slump in prices; we still forecast a modest 2% decline in H2 2022.
We have revised up our forecast for Q4 CPI inflation by 1.0pp since early July; energy prices have surged again.
But we have revised down our forecast for the level of GDP by only 0.5pp in Q4; fiscal policy will respond.
People also have shown more willingness to deplete savings; we still expect a recession to be narrowly avoided.
Households saved much less and borrowed more in Q2; real spending, therefore, likely was unchanged from Q1.
On paper, households have ample scope to reduce their saving rate further, but we see several constraints.
Some already have depleted savings, credit conditions are tightening, and deleveraging will be more attractive.
The tax cut plans of Tory leadership contenders should be treated with a pinch of salt, given past experience.
Tax cuts won't lift GDP, if they are financed partially by spending reductions; the latter have a higher multiplier.
We doubt that even Ms. Truss would take away the BoE's independence.
Business investment fell in Q1, partly due to supply disruption preventing orders being fulfilled.
But supply shortages are easing, and with Brexit and Covid uncertainty dissipating, capex should rebound.
A renewed rebound in business investment will support GDP growth in the second half of the year.
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.
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