The slowdown in the pace of core price rises in the Eurozone in November is a good omen for the U.K.
Inflation expectations among households and businesses are falling, now that a recession is taking hold.
Manufacturers’ and retailers’ excess inventory reinforces the case for expecting goods inflation to drop.
Samuel Tombs (UK Economist)U.K.
- Expectations for Bank Rate and gilt yields still are higher
than before the mini-budget, despite the u-turn.
- The forthcoming real-terms reduction in government spending looks set to be bigger than in the 2010s.
- Bailey's warning of a "stronger response" than anticipat- ed in August doesn't endorse markets' rate expectations.
Samuel Tombs (UK Economist)U.K.
- The outlook for gilt yields beyond this month depends on the economy’s performance, not LDI fund turmoil.
- August’s GDP data show a recession was underway before the surge in economy-wide borrowing costs.
- Inflation pressures will be extinguished by the recession; the BoE doesn’t need to go into overdrive.
Samuel Tombs (UK Economist)U.K.
- We now look for a 1.5% year-over-year drop in GDP in 2023, worse than our prior forecast for a 1.2% decline.
- The Energy Price Guarantee has shored up real in- comes, but the tax cuts are counterproductive, net...
- ...The hit from the resulting drop in sterling and rise in mortgage rates will outweigh the direct fiscal boost.
Samuel Tombs (UK Economist)U.K.
- A recession now is all but inevitable; the key questionis how the pain will be distributed.
- Hiking Bank Rate to 6% would crush domestically-generated inflation; mortgage defaults would soar.
- Hiking more slowly would depress sterling and boost imported inflation, but is the lesser evil for the MPC.
Samuel Tombs (UK Economist)U.K.
- The improved near-term outlook for CPI inflation has left the MPC less anxious about second-round effects.
- The MPC is awaiting more details on fiscal policy; a 75bp hike in November can't be ruled out...
- ...But the proposed tax cuts will do little to boost GDP, and spending might be cut; we still expect a 50bp hike.
Samuel Tombs (UK Economist)U.K.
- June's 0.2% month-to-month rise in GDP was due to the unwinding of the Jubilee hit; the trend is flat.
- We’re pencilling-in a 0.2pp hit to September GDP from the extra public holiday, but can’t rule out a bigger fall.
- Even excluding the impact of the Queen’s funeral, Q3 GDP looks set to undershoot the MPC’s forecast.
Samuel Tombs (UK Economist)U.K.
- The average household will spend less on energy over the next six months than during the last six.
- So a winter recession now looks unlikely, and the MPC can return to focussing on core CPI inflation.
- Fiscal policy will stabilise demand, not lift it; job market slack still looks set to emerge, limiting rate hikes.
Samuel Tombs (UK Economist)U.K.
- We look for a modest 0.3% month-to-month rise in July
GDP, leaving it only 0.1% up from three months earlier.
- The composite PMI has pointed to stronger growth, but it excludes the distribution and health sectors.
- Revised GDP estimates later this month likely will show that economic activity still is below its pre-Covid peak.
Samuel Tombs (UK Economist)U.K.
- Ms. Truss has been tight-lipped about her plans, but a
trade body plan to freeze prices is gaining traction.
- If implemented, CPI inflation will return to the 2% target in 2023, easing the pressure for further big rate hikes.
- Firms need help too, though we think Ms. Truss will cut business rates and provide grants, not reduce VAT.
Samuel Tombs (UK Economist)U.K.