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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.
The first quarter’s rise in GDP has brittle foundations; households have had to retrench in Q2.
The support to GDP growth from restocking will fade; firms now have enough inventory to meet demand.
A recession, however, isn’t likely; households’ real dis- posable incomes will rise in Q3, and capex will recover.
CPI inflation in May was 1pp higher in the U.K. than in theEurozone; Brexit hasn’t helped but isn’t the main cause.
U.K. core goods prices were depressed more by lock- downs; base effects will lower the U.K.’s rate soon.
The relative strength of U.K. services inflation is due to VAT hikes and a rise in course costs for E.U. students.
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.
The composite PMI held steady at 53.1 in June, but it has been misleadingly upbeat in recent months.
It excludes the retail and public sectors, both of which will drag on quarter-on-quarter GDP growth in Q2.
We still forecast a 0.7% q/q drop in Q2 GDP, and only a 25bp increase in Bank Rate in August.
Core CPI inflation declined to 5.9% in May, from 6.2% in April, and will fall further in June.
Retailers are shrinking their margins, rather than passing on surging producer prices fully to consumers.
Faltering demand will constrain future core price rises, enabling the MPC to stop its hiking cycle this year.
Estimates of the distribution of savings can be derived by reconciling data from a few ONS surveys.
Our calculations suggest households in the top 10% of the income distribution hold 25% of the excess savings.
The current wave of rail strikes do not meaningfully increase the risk of a recession this year.
We think the headline rate of CPI inflation was stable at 9.0% in May, despite rising food and fuel inflation.
Core CPI inflation likely fell; data suggest the rise in goods prices didn’t match the big jump a year ago.
Retailers are starting to accept a squeeze on the margins, while used car prices are continuing to fall.
Year-over-year growth in private-sector wages slowed to 4.7% in April, slightly below the MPC’s 4.8% forecast.
The job market no longer is tightening, as the workforce recovers and growth in employment starts to slow.
We still expect the workforce to recover further, anchoring wage growth and easing the pressure for rate hikes.
April's fall in GDP was driven by Covid spending, but flat private sector GDP caused the downside surprise.
Consumer services firms likely increasingly struggled during Q2, as households' real incomes fell further.
June's extra bank holiday also will dampen Q2 GDP; the MPC has to lower its forecast for 0.1% q/q growth.
The MPC was clear last month; no more than two 25bp rate hikes would be needed to tame inflation.
Since then, activity indicators have weakened and medium-term inflation expectations have stayed low.
A majority will vote again to hike by 25bp, and investors will be left revising the odds of 50bp in August.
The OBR’s March forecasts suggest tax cuts equal to 1.0% of GDP are permissible under the fiscal rules.
But since then, the Treasury’s borrowing costs have risen, reducing scope for tax cuts to 0.7% of GDP.
The Tories will be reluctant to ditch the rules, as this would inhibit their ability to criticise Labour’s plans.
The fall in May’s composite PMI to a 15-month low is a clear sign that growth is faltering as real incomes drop.
Retail and car sales also have been weak; we expect a quarter-over-quarter drop in GDP in Q2 of about 0.5%.
May’s PMI makes it more likely the MPC will hike by just 25bp this month; markets' expectations are too high.
The additional fiscal support means we expect a smaller 1.5% fall in real incomes in 2022, compared to 2.5%.
We have revised up our forecast for GDP in Q3 and Q4 as a result; but a recession still cannot be ruled out.
We now expect Bank Rate to top out at 1.50% this year, but we still think markets' expectations are wild.
The labour market currently is very tight, largely due to a sharp decline in the size of the workforce.
We think, however, that around half of that decline will reverse by end-2023, keeping a lid on wage pressures.
This is one reason why we think the MPC will hike Bank Rate by less than markets expect.
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.
The PMI points to GDP flatlining in Q2, but a fall is more likely, given the plunge in government Covid spending.
The MPC shouldn't take comfort from the resilience of the employment index; it lags changes in the PMI.
Many firms still are hiking prices, but the number absorbing cost rises, due to faltering demand, is growing.
CPI inflation likely would hit the 2% target by April 2023, if energy prices instantly return to early January levels.
Past experience suggests a temporary 2.5pp VAT cut would lower CPI inflation by only 0.3-to-0.6pp.
A 10% depreciation of sterling would boost the CPI by 0.75pp after one year, and by 2.75pp in the long term.
Higher energy prices and tax rises pushed up the headline rate of CPI inflation to a 40-year high in April.
But there were encouraging signs that retailers are starting to absorb some of the surge in producer prices.
Inflation will ease over the summer as base effects kick in and the real income squeeze inhibits services price rises.
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