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- The Hit To The Economy From Omicron Will Be Fleeting....But Falling Real Incomes Will Constrain The Recovery
- The Tories now trail Labour by 10pp in the polls; a no-confidence vote in Johnson is a growing possibility.
- Markets probably would prefer a more predictable successor who had a less combative Brexit stance...
- ...But the gap between the Tories and Labour on economic policy has narrowed.
- Near-real-time indicators are broadly consistent with our forecast that GDP fell by 0.6% m/m in December.
- OpenTable/CHAPS data signal weak pre-Christmas trading for hospitality; transport usage dipped too.
- Omicron cases, however, should fall substantially by February, enabling GDP to begin rising again.
- The default tariff energy price cap looks set to rise by 47% in April, pushing up CPI inflation to 6.2%.
- The rise will be larger, if suppliers are immediately compensated for acquiring failed competitors' customers.
- Removing VAT would limit the inflation peak to 6.0%; a supplier loan scheme could have a bigger impact.
- The return of monthly saving to pre-Covid levels is a sign of the real income squeeze, not surging spending.
- The recent surge in house prices, however, is enabling refinancing homeowners to access lower interest rates.
- Firms continued to repay external borrowing in November, but we remain upbeat on the capex outlook.
- Consumer caution in response to Omicron points to a near-1% fall in GDP between November and January.
- Surging energy prices have forced us to revise up our forecast for this year's peak rate of CPI inflation to 6.0%.
- The MPC, however, likely will wait until March to hike rates again, given the large hit to activity from Omicron
- House price growth dipped in October following the return of Stamp Duty Land Tax threshold to £125K...
- ...But that most likely is a blip; timelier indicators of house price growth have remained strong in Q4.
- We expect house price growth to stagnate in H1 2022, as mortgage rates rise and real incomes fall.
- The supply of labour has dropped over the past two years, in part due to a lower participation rate.
- Over-50s have been a key driver, due to early retire- ment or long-term sickness following Covid-19.
- We think the participation rate now is on a perma- nently lower path, limiting trend growth this decade.
The U.K. economy will start 2022 on a weakened footing, and will put in an underwhelming performance for the year as a whole.
- The Economy Needs Breathing Space To Get Over Omicron....The MPC Likely Will Wait Until May To Hike Bank Rates Again
Markets now expect the MPC to hike Bank Rate to 0.50% in February, following today's surprise hike.
Most members, however, thought the decision was "finely balanced" and see a "modest" tightening ahead.
Omicron won't just have short-term effects if the MPC hikes again and pushes firms over the edge.
- The MPC likely will hold back from raising Bank Rate next week, despite several upside data surprises.
- We are cutting our forecast for quarter-on-quarter GDP growth in Q1 to 0.3%, from 0.8%, due to Omicron.
- The Covid situation won't be better in early February; the March meeting is a better bet for the first rate hike.
- The MPC would ease monetary policy again in the unlikely event that another lockdown is imposed.
- Fiscal policy would be less supportive than in previous lockdowns; new curbs would dampen inflation.
- Negative rates are in the toolkit and are preferred to more QE; Bank Rate likely would be cut to -0.25%.
- Recent activity data have surprised to the upside, but the Omicron variant casts a shadow over Q1.
- The near-term path for inflation looks much higher than a month ago, after October's above-consensus data.
- The MPC likely will hike Bank Rate in December, but markets' expected 2022 rate path looks far too steep.
- A December Rate Hike Now Looks Likely...But The 2022 Rate Path Antipicated By Markets Is Too Steep
- The Conservatives' poll lead has virtually disappeared; we doubt it will re-emerge next year.
- Higher inflation and rising interest rates will keep consumers' confidence weak.
- A hung parliament would bring to the fore Brexit and Scottish independence risks again, weakening sterling.
- Nearly 4% of all staff still were furloughed in September, yet redundancies appear to have remained low.
- Involuntarily part-time working, however, likely became much more widespread in Q4.
- October's labour market data will be partial and might not offset concerns about the recovery's strength.
- Budget announcements, including the jump in National Living Wage, will support earnings growth next year...
- ...but higher taxes and inflation suggest real take home pay will fall by 1.5%, the most since 2011.
- This is one key reason we expect the MPC will hike Bank Rate by less than markets currently expect.
- The near-term outlook for GDP has worsened, but 2022 looks a little brighter in the wake of the Budget.
- Higher energy prices mean we have revised up our forecast for CPI inflation in 2022 to 3.6%, from 3.4%.
- We now expect two rate hikes, not one, in the next 12 months, but still anticipate no change this week.
- The Chancellor spent only about half of the windfall stemming from the OBR's rosier economic forecasts...
- ...In order to build scope to cut taxes before the next election, while still meeting his new fiscal targets.
- The OBR's new GDP forecasts are too upbeat, while its debt interest forecast is too low, but this won't matter.