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Inflation and supply chain crisis to throttle UK economy, IMF warns

The global supply crunch and roaring inflation will choke UK growth this year, the world’s economic watchdog warned today.

A combination of the supply chain crisis rumbling on and the cost of living corroding Brits’ incomes has prompted the International Monetary Fund (IMF) to downgrade their forecasts for UK economic growth this year to 4.7 per cent from five per cent previously.

Weaker confidence in Britain’s prospects underlines the severity of the inflation spike sweeping across the country.

The Bank of England needs to urgently tighten monetary policy in order to get on top of the soaring cost of living in the UK, the IMF said.

In developed economies “where high inflation runs the risk of becoming entrenched… extraordinary monetary policy support should be withdrawn,” Gita Gopinath, first deputy managing director at the IMF, warned.

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Inflation is running at its highest level in nearly 30 years, hitting 5.4 per cent last month, according to the Office for National Statistics.

Former members of the Bank’s rate setting committee have criticised Threadneedle Street’s inertia as contributing to the cost of living taking off.

Sir Charlie Bean yesterday said the Bank missed an opportunity to combat price rises at the back end of 2021, meaning it will have to launch a cycle of rapid rate hikes to tamp down on inflation.

Some economists expect the Bank to lift interest rates four times this year, taking them to 1.25 per cent by the end of 2022.

Jerome Powell, Chair of the US Federal Reserve, is also widely expected to tell markets to get ready for a rapid tightening of monetary policy this year at the central bank’s meeting of policymakers tomorrow.

Fears that a corrosion in Brits’ living standards caused by soaring inflation will trigger a pull back in consumer spending has ignited a flurry of top City economists to become more downbeat on the UK’s recovery.

Capital Economics, a consultancy, also today dropped their forecasts for UK growth this year to four per cent.

The UK economy is heavily reliant on people spending at services businesses, such as pubs and restaurants, to generate growth, indicating a dip in purchases would whack output.

The IMF downgraded projections for US economic growth this year to four per cent from 5.2 per cent.

EU countries are also expected to grow at a slower pace than first forecast, as is the global economy.


Source: City AM

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Rising costs seep into every sector of UK economy

Every sector of the UK economy is suffering from swelling costs in a sign that inflation will trend much higher in the coming months, reveals a fresh study published today.

Higher wages, compounded by soaring energy and raw material costs, are severely eroding firms margins, according to research carried out by high street lender Lloyds.

The fresh figures reinforce official data published by the Office for National Statistics yesterday showing British businesses’ input costs have soared 13.5 per cent over the last year.

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Jeavon Lolay, head of economics and market insight at Lloyds, said firms’ cost backdrop remains “acute as higher energy prices and wage bills pushed up firms’ expenses”.

Widespare cost increases have ensnared British businesses since the UK emerged from Covid-19 restrictions last spring, mainly triggered by a global supply chain crisis and an energy crunch on the Continent.

The spread between British firms’ costs and prices is the joint highest of any country tracked by Lloyds, raising the prospect of inflationary pressures worsening if businesses hike prices in an effort to shield their margins.

A looming 1.25 percentage point NI hike this April will add to firms’ costs.


Source: City AM

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UK economy to shrug off Omicron quickly but lean into inflation blizzard

The UK economy will shrug off the impact of the Omicron variant quickly, but will then fall into an inflation blizzard, top City economists have bet.

Despite widespread concerns the new strain would plunge the economy back into doldrums seen during previous periods of high virus cases, the impact of the Omicron variant will be mild.

Covid-19 cases are seemingly peaking in London, the capital’s health chief said this week, in a sign that the UK government’s decision to stick to plan B has paid off.

The likelihood of further curbs on daily life being introduced has receded significantly, igniting a string of bullish assessments from top City experts on the UK economy’s prospects.

“The worst of the Omicron wave now is behind Britain,” said Smauel Tombs, chief UK economist at Pantheon Macroeconomics, adding he now expects plan B measures to expire at the end of January.

The UK economy has snapped back sharply after previous waves of the virus have filtered through the country, indicating output will propel higher beyond January. Pantheon have hiked their forecasts for UK economic growth for the first three months of the year to 0.2 per cent from zero.

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Andrew Goodwin, chief UK economist at Oxford Economics, said: “With Omicron rapidly moving through the population, this wave should prove short-lived.”

“Activity is likely to rebound strongly as case numbers fall, so GDP should return to pre-Omicron levels in early spring.”

“Restrictions now look likely to be soft in scale and shorter in duration, with the economy potentially reversing restrictions over the next month,” said Sanjay Raja, senior economist at Deutsche Bank, said:

Most in the City now think the economy will hit pre-pandemic strength in the first half of 2022.

In a sign that Britain’s recovery was already steaming ahead before the emergence of Omicron, Friday’s GDP print is expected to come in strong.

Analysts at investment bank Deutsche Bank are pencilling the economy to expand 0.4 per cent in November, up from 0.1 per cent in October, driven by a rise in consumer spending.

However, the soaring cost of living is now seen as the number one risk to derailing Britain’s recovery among experts.

“It’s highly unlikely that pay will keep pace with price gains for most (if not all) of this year. That will cap consumer spending growth,” warned James Smith, developed market economist at ING.

Some experts in the City think inflation could top seven per cent this April, led higher by the energy watchdog, Ofgem, hiking the cap on energy bills 50 per cent.


Source: City AM

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Mortgage arrears fall to lowest level since mid-2000s

New mortgage arrears cases have reached their lowest level since the global financial crisis of 2008, but rate rises could lead to more arrears, a tax advisory firm has warned.

According to Paul Rouse, partner at Mazars, there were just 8,597 new cases of arrears by the end of 2021, compared to 40,000 a quarter at the height of the global financial crisis.

But Rouse warned this good news might not last, with an increase in arrears seemingly ‘unavoidable’.

He said given the Bank of England’s recent interest rate rise from 0.10 per cent to 0.25 per cent – and more on the horizon in 2022 – it may be “inevitable” that more mortgages fall into arrears.

Over the past decade, record low interest rates created an environment where homeowners had been able to avoid arrears as mortgage providers followed the BoE’s base rate down.

In recent years, increased savings and reduced expenditure during lockdown and the effects of the furlough scheme have also contributed to driving mortgage arrears down.

Banks also contributed to the low level of defaults on mortgages by following Financial Conduct Authority guidance in 2020 to show forbearance to borrowers in difficulty during the pandemic.

According to Mazars/BoE data, the total number of mortgages in arrears is also near record lows, with 122,061 cases in total in the UK at present.

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But inflation has reared its head, with UK GDP having been widely forecast to increase by nearly 5 per cent in real terms this year, and inflation expected to touch 6 per cent and unemployment at just over 4 per cent.

Rouse said: “With interest rates rising to combat inflation – we may in turn see mortgage arrears and rates go up soon. If the Omicron variant persists it may delay the rise but an eventual increase is inevitable.

“The danger if interest rates continue to rise some who have been comfortably repaying their mortgages may begin to struggle.

“While the vast majority of home owners can repay their mortgages at the current interest rates without difficulty, many would find it significantly more challenging if interest rates were 5 per cent or higher.”

Lower rates for longer?

In March 2009, the BoE put the rate down to 0.5 per cent, the lowest level it had been since October 1694, when the Bank first began recording rates.

It stayed at this level until August 2016, when it dropped briefly to 0.25 per cent following the vote to leave the EU in June of that year, before rising again to 0.5 per cent in 2017.

Since then, the BoE merely tinkered with the levels, dropping them to 0.1 per cent as a result of the Covid-19 pandemic.

With lower base rates, borrowers have enjoyed lower levels of interest on their mortgage loans.

Even at the start of 2022, mortgage lenders were lowering some rates to encourage potential homeowners.

For example, the Nottingham welcomed in 2022 by announcing rate drops of up to 70 basis points across its residential range.

Its two-year fixed 80 per cent LTV product with £1,499 (£199 upfront) fees was reduced from 2 per cent to 1.3 per cent, while the building society cut the rates of two and five-year fixed products – all available for purchase or remortgage – at 85 per cent and 95 per cent loan-to-value.

Meanwhile, mortgage approvals are also still high and likely to remain so for much of 2022.

Kimberley Gates commented: “The stamp duty holiday helped spur a huge flurry of homebuyer activity for much of 2021 and so a steady decline in mortgage approvals was always likely to materialise following the final September deadline.

“However, this decline should be viewed as a return to pre-pandemic normality rather than a sign of dwindling health and the market continues to defy expectation and exceed industry forecasts where top-line performance is concerned.”

She said while 2022 was “unlikely” to bring the same frantic market conditions as the last year, Sirius does not expect there to be a significant reduction in buyer demand and therefore any further notable decline in mortgage approval levels.

By Simoney Kyriakou

Source: FT Adviser

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What does 2022 have in store for the UK economy?

Growth slowed more than expected in 2021Q3, with the GDP increase revised down to 1.1% (QOQ) from 1.3%. Moreover, the Markit surveys suggested activity slowed in December.

Nevertheless, assuming there are no major extensions to Covid-related restrictions, growth should continue into 2022 and GDP could show annual growth of 4% after 7% in 2021.

Prospects are, however, clouded by higher inflation, partly driven by higher energy bills, which will squeeze household incomes. Households are also facing higher taxes and higher interest rates (to over 1% by end-2022, priced in by the markets).

Markit surveys for December suggested growth had stalled in Germany but was still firm in France. US growth also looked firm, though inflationary pressures continued to mount.

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Lord Frost resigned as Minister of State in the Cabinet Office and Chief Negotiator of Task Force Europe on 19 December. Foreign Secretary Liz Truss assumed his Brexit responsibilities.

Ruth Lea said “Even though growth should continue into 2022, prospects are clouded by uncertainties. The two main ones are, arguably, the possibility of tighter Covid-related restrictions and, secondly, inflation and the future trajectory of oil and gas prices, major rises of which have been driving inflation higher. On the possibility of tighter restrictions, the Prime Minister has resisted imposing further restrictions so far and, moreover, appears reluctant to do so. Concerning inflation, the annual rate should fall back in 2022H2, not least of all reflecting base effects, assuming there are no further major hikes in energy prices. Indeed, prices may reverse if production is stepped up. But this assumption is a very big, and very uncertain, assumption”.

Source: LLB

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Inflation will get worse before it gets better in 2022

Investors should brace for high inflation to persist into next year if supply chain hold ups are not dealt with, according to experts.

Towards the end of 2021 the impact of higher prices was already being felt. Stocks wobbled while bond prices rose as central banks began taking measures to combat higher inflation, including raising interest rates and cutting back their asset purchasing programmes.

If this persists, growth stocks – such as the giant technology companies – should lag as these stocks are generally on higher valuations due to their future earnings prospects. When rates rise, however, these future earnings have a higher discount rate, reducing their appeal.

Similarly, bonds should also perform poorly, as higher interest rates should lead to higher bond yields and therefore lower prices.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said it is something investors should brace for heading into next year.

“The snarled up supply chains all over the world that have forced prices higher, don’t look set to ease significantly,” she said.

Guy Foster, chief strategist at Brewin Dolphin, said that production delays will be resolved and supply will catch up with demand, but not until the end of next year.

Until then, prices will continue to climb and central banks will be under increasing pressure to implement tighter monetary policies.

Inflation rates are currently well above central banks’ aims of 2%, leading to fears that increasing prices may lead to a mismanagement of monetary policy.

Streeter warned that the balancing act of combating inflation with stimulus programmes while ensuring economic growth, “may keep a lid on valuations, squeezing exuberance out of the markets”.

However, banks risk ‘stagflation’ if they do not act, according to Ben Russon and Will Bradwell, fund managers at Franklin Templeton. This could occur in some markets next year if inflation rates exceed GDP growth.

Central banks have already started to act, but differ on their approaches. Below, Trustnet looks at how the three main central banks are tackling inflation in their regions in 2022.

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Bank of England

The Bank of England (BoE) rose interest rates to 0.25% after inflation rose to 5.1% in November, the highest it has reached in 10 years.

Changes to monetary policy are a rarity for the BofE, which has barely altered interest rates for much of the past decade, but the current inflation situation became too big to ignore.

David Roberts, head of the global fixed income team at Liontrust, said: “With RPI running at 7%, unemployment falling fast and fears that further lockdowns would only fuel further price rises, delaying rate hikes would surely have been a mistake.”

The bank has had to rethink its outlook after its original prediction that inflation would not reach 5% until spring next year was quickly shattered. New estimates anticipate that inflation in the UK will peak at 6% in April before easing.

However the loaming threat of Omicron and stricter covid restrictions on the horizon could fast forward inflation again, leading to additional monetary tightening in the new year.

Slow GDP growth, which rose just 0.1% in November, made the bank hesitant to raise interest rates and stifle an already struggling economy. With a potential lockdown inbound, economic growth may slow down to the backdrop of rising inflation.

Laura Suter, head of personal finance at AJ Bell, said: “While Omicron is still a worry for the Bank, rampant inflation is clearly an even bigger concern.”

Federal Reserve

The US Federal Reserve (Fed) has taken one of the most aggressive strategies to combat inflation by tapering its bond purchasing programme.

The bank announced that it would be doubling its monthly tapering to $30bn (£22.5bn) after inflation in the US reached 6.8% in November, its highest level since 1991.

Ellen Gaske, lead economist, G10 economies on the global macroeconomic research team and Robert Tipp, chief investment strategist and head of global bonds at PGIM, said: “Fed officials are nervous inflation dynamics could take hold without more aggressive Fed action.”

After the tapering policy ends in March, Fed officials expect interest rates will be raised three times in 2022.

The Fed aims to reduce inflation rates to 2.6% by the end of next year through these monetary policies, but this may be overly optimistic, according to Kristina Hooper, chief global market strategist at Invesco.

She said: “We do think inflation could remain high — and even rise further — in coming months. However, our base case for 2022 expects the rate of increase to peak by mid-year as supply chain issues resolve, vaccination levels increase and more employees return to the workforce. So in the back half of 2022, we do not expect prices to continue to rise at a quickening pace.”

European Central Bank

The European Central Bank (ECB) also announced that it will be ending its Pandemic Emergency Purchase Plan in March 2021, but offset much of this by doubling the long running Asset Purchase Programme. It also gave no indication of an interest rate rise.

The bank is keeping its monetary policy flexible around the unpredictability of covid, not wanting to slow economic recovery as inflation rises.

Interest rates could potentially rise next year if inflation rates reach 2% ahead of its mid-year predictions, the bank says.

The ECB continues to describe the inflation problem as “transitory”, whereas the UK and US central banks are creating more long-term solutions, albeit with higher domestic inflation levels.

By Tom Aylott

Source: Trustnet

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UK Economy: Inflation at highest level since 2011 as cost of living soars

UK inflation has hit its highest level for more than a decade as supply chain disruption and record fuel prices have sent the cost of living soaring, according to official figures.

The Office for National Statistics (ONS) said the rate of Consumer Prices Index (CPI) inflation rose from 4.2% in October to 5.1% in November – the highest since September 2011 and a bigger leap than feared.

The data also revealed that the Retail Prices Index (RPI) measure of inflation soared to its highest level for more than 30 years – hitting 7.1% last month, up from 6% in October.

Laying bare the mounting cost-of-living crisis facing Britons, the ONS reported surging prices across a raft of goods and services, including for fuel, energy, cars, clothing and food.

Figures showed that petrol prices jumped to the highest ever recorded – 145.8p a litre last month – while the cost of used cars also raced higher due to shortages of new motors as supply chain issues continue to affect the economy.

It is the first time that CPI has breached 5% for more than a decade and sees inflation remain more than double the Bank of England’s 2% target.

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The data puts further pressure on the Bank ahead of its interest rate meeting on Thursday, with policymakers having to weigh up the need to rein in rampant inflation but also to support growth as the threat of Omicron grows.

The eye-watering leap in inflation is higher than had been expected, with economists having pencilled in a rise to 4.8% in November.

Chancellor Rishi Sunak said: “We know how challenging rising inflation can be for families and households, which is why we’re spending £4.2 billion to support living standards and provide targeted measures for the most vulnerable over the winter months.

“With a resurgence of the virus, the most important thing we can do to safeguard the economic recovery is for everyone to get boosted now.”

But Labour claimed the Government is not doing enough to tackle rapidly-rising inflation.

Shadow chief secretary to the Treasury Pat McFadden said: “These figures are a stark illustration of the cost-of-living crisis facing families this Christmas.

“Instead of taking action, the Government are looking the other way, blaming ‘global problems’ while they trap us in a high-tax, low-growth cycle.”

The ONS said the price rises were “broad-based” in the economy, with households coming under increasing pressure from steep hikes in gas and electricity costs.

Food prices are also climbing noticeably higher as supply chain problems hit retailers hard, with inflation for food and drink running at 2.5% last month – the highest for more than three years.

Elsewhere, the data showed that the CPIH, which includes owner-occupiers’ housing costs and is the ONS’s preferred measure of inflation, was 4.6% in November, compared with 3.8% in October.

Economist Samuel Tombs, at Pantheon Macroeconomics, said inflation is now “uncomfortably high” for the Bank, but believes rate-setters will still hold fire this week.

“The quick ascent of CPI inflation over the last four months probably will not panic the MPC into raising interest rates this week, given that the full extent of the economic damage wrought by Omicron is still unknown,” he said.

By Scott McCartney

Source: The Scotsman

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What could Omicron mean for UK economy?

As various parts of the world embrace, to varying extents, new pandemic restrictions, investors must also question a range of assumptions around the economic outlook.

In the weeks prior to the announcement that a new, potentially more virulent strain of Covid-19 had emerged, the market was fixated on the question of inflation and of when and to what extent monetary policy would be tightened around the globe to combat this.

Prior to the pandemic, the advent of restrictions on people’s ability to consume, work and travel would have been viewed by the majority of market participants as distinctly deflationary events, with the level of demand in the economy falling.

The shock for policymakers in 2020 was that demand held up better than could have been expected, with consumers embracing online shopping and workers proving productive at home.

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Demand holding up better than expected was met by supply problems, as companies, anticipating a much worse outlook for demand than happened, had cancelled production or manufacturing orders, contributing to subsequent supply shortages, which created supply side inflation.

With economies far more used to remote working, there is arguably greater certainty around the levels of demand amid Omicron, but across the range of possible scenarios, there is also a greater level of certainty that inflation will persist, says George Lagarias, chief economist at Mazars.

He says: “There is a six in 10 chance that Omicron is a negative for both growth and inflation. On the inflation side, it’s important to realise that 6/7ths of the world’s population is not vaccinated. And those people are mostly in the areas where the global supply chains are, so the likelihood is that, whatever happens to demand, supply chains will be impacted, and they were pretty beaten up already, and that will mean supply side inflation.”

Inflation nation

David Miller, executive director at Quilter Cheviot, is more sceptical that the new variant will create a further bout of supply side inflation.

He says: “I was amused to read a well thought out report linking the emergence of the Omicron variant to higher inflation. The argument went as follows: as restrictions are reimposed we will spend less on services, for example going to restaurants, and go back to buying goods for use at home, thus exacerbating supply chain shortages. All entirely possible, but too clever by half I suspect.”

Lothar Mentel, chief investment officer at Tatton Asset Management, takes the slightly different view that supply chains issues had begun to improve in recent months, and this could lead to the type of inflation we have experienced of late changing, albeit with inflation remaining high.

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He says: “Despite expressing concerns about the inflation outlook, [we] are of the opinion that supply chain issues may be fading. Since October, ocean container shipping costs from Shanghai to Europe are down by more than 6 per cent, and from Shanghai to US ports by more than 20 per cent, [according to the World Container Index].

“The recent rise in the Baltic Dry freight shipping index is probably driven by an upswing in demand from China – containers are once again returning to China filled with goods, having often gone back empty in recent months.”

He adds: “As a result, we do not expect any inflation follow-through from these rising shipping volumes – perhaps the opposite. Rising worker power as a consequence of labour shortages would be one reason to expect inflation to become sustained rather than remain a temporary phenomenon tied to supply bottlenecks.

“However, rising wages create a different outcome to supply chain issues. Ultimately, relatively low-paid workers spend a lot more of their earnings than the highly paid and the owners of capital. While there is good reason to expect a wage-price spiral of sorts, ultimately pricing power must mean that the workers benefit, and that real wages rise. That will get spent – especially given household balance sheets have improved during the past two years – so rising real wages translate into rising real economic activity.”

Rates uprising?

While such an outcome would likely be positive for economic growth, Mentel says it may be tougher for investors, as company profit margins may be lower.

A scenario where we switch from having predominantly supply side inflation to mostly demand side would help central banks as they try to decipher the puzzle of whether to tighten monetary policy in the gale of a pandemic.

In March 2020, as the world reeled from the scale and severity of the pandemic, the Bank of England cut interest rates in order to preserve demand in the economy, but with demand having held up well, and inflation greatly exceeding the bank’s 2 per cent target, there is the possibility that rates should rise, and quantitative easing be scaled back.

The idea that the level of inflation is predominantly linked to the level of money supply in the economy, rather than to variations in the level of supply and demand for goods and services in the economy, is central to the economic theory known as monetarism.

The challenge, says Lagarias, is that it is hard to see how higher interest rates help address supply side inflation, as they increase the cost of expanding production if one has to borrow the money to do so. The argument the other way is that the present interest rate level in the UK was designed for emergency conditions, and the emergency has passed, so rates should rise.

Lagarias says rates will rise because central banks “don’t want to admit” that they cannot control supply side inflation as it would damage their reputations. He adds governments are also likely to want rates to rise as a way to address inflation, as that is a matter of public concern right now.

Matteo Germano, head of multi-asset at Amundi, has made up his mind about the consequences of such an action. He says he is negative on the outlook for UK equities right now as a result of the present monetary and fiscal policies being pursued in the country.

Lagarias says at present equity markets appear not be factoring in significantly higher rates.

European dreams

The European Central Bank has been more cautious in its language around putting rates up. This may to some extent be that the institution is reflecting on past errors, as it lifted rates prematurely in 2011,seeding a crisis in the economic bloc, a fresh recession, and concerns that the impact could spillover into a “double dip” recession in the UK.

Miller says the ECB, by simply ignoring the present 5 per cent inflation rate in the bloc are “playing with matches whether they realise it or not”, as wage rises remain below the level of inflation, so citizens are getting poorer.

In terms of what all of this means for markets, Rupert Thompson, chief investment officer at Kingswood, says volatility is likely to remain very high in markets, with bond yields likely to rise next year, putting pressure on all other asset classes, even if, in the short-term, the new variant delays rate rises.

By David Thorpe

Source: FT Adviser

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Soaring inflation and tax hikes to squeeze UK economy

TAX hikes, soaring inflation and an end to pandemic-related government support is souring the UK economy’s prospects, according to City analysts.

Brits’ spending power will be eroded by the intensifying cost of living crisis, restricting their ability to splash the cash and drive the economy, analysts at Deutsche Bank warned today.

Inflation is accelerating at the fastest pace in nearly a decade, climbing to 4.2 per cent last month, up from 3.1 per cent in September, according to the Office for National Statistics.

Fiery price rises are threatening to derail the UK’s economic recovery from the Covid-19 pandemic by crimping consumers’ willingness to spend.

The UK economy is heavily reliant on the services industry to generate growth, meaning a sharp slowdown in consumer spending will produce severe downside shocks to the country’s growth prospects.

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The British economy will grow just 3.6 per cent next year, much lower than the Bank of England’s forecast of five per cent, experts at the German investment bank have predicted.

A combination of historically high inflation and tax hikes will cost the UK economy around £13.5bn next year, roughly 0.6 per cent of GDP.

Sanjay Raja, UK economist at Deutsche Bank, said: “As we turn the page on 2021, one thing is clear: consumers are already starting to feel the pinch of eroding spending power.”

“This has already started to filter through into recent consumer confidence data, which paints a bleaker picture of weakening confidence in both households’ economic and personal financial outlooks.”

In a separate note published today, British bank Barclays estimates the UK economy will expand 6.9 per cent this year, and then 4.1 per cent next year, before cooling to settle around its pre-pandemic trend of 1.3 per cent in 2023.

The lender expects the global economy to grow six per cent this year.

“Supply chain problems have not just persisted; new ones have arisen. Inflation has been much stronger, for far longer, than central banks expected,” Ajay Rajadhyaksha, head of macro research at Barclays, said.


Source: City AM

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Bank of England official warns inflation could top 5% as UK economy slows

Inflation could surge above 5% early next year in the United Kingdom, according to the Bank of England’s top economist, as product and labor shortages continue to hamper the country’s economic recovery.

“I would not be shocked — let’s put it that way — if we see an inflation print close to or above 5% [in the months ahead],” Huw Pill told the Financial Times. “And that’s a very uncomfortable place for a central bank with an inflation target of 2% to be.”

Pill declined to reveal how he would vote at the Bank of England’s next meeting on November 4, but he said that the question of whether policymakers should hike interest rates from 0.1% is “live.” Central banks use interest rates to keep inflation low and stable.

Inflation has been running near 3% in the United Kingdom as the country’s economy bounces back from a steep contraction in 2020 caused by the coronavirus pandemic. But there are signs the recovery is faltering, even as inflation remains stubbornly high.

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The latest worrying signal came Friday, when the Office for National Statistics said that retail sales volumes fell for a fifth consecutive month in September. That’s the longest streak of consecutive declines since records began in 1996. Non-retail spending was also weak.
Economists worry that the United Kingdom may be entering a period of “stagflation” characterized by weak economic growth and rising prices.

“The whiff of stagflation is greater in the UK than in most other economies and we now think temporary shortages will restrain GDP for longer and boost inflation by more than we previously thought,” Capital Economics analysts wrote this week.
“This won’t be anywhere near as severe or as persistent as in the 1970s,” the analysts said.
“But for the next six months, the worsening product and labor shortages will put the brakes on the economic recovery at the same time as higher energy prices drive up CPI inflation from 3.2% in August to a peak of around 5.0% in April next year,” they added.

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The United Kingdom is facing severe labor shortages, including a shortfall of 100,000 truck drivers, and workers are demanding higher wages, contributing to inflation. Energy prices have risen sharply across Europe, and some businesses are passing along higher costs to consumers.
British consumer goods giant Unilever (UL) — which sells products around the world — said Thursday that it hiked prices by 4.1% in the quarter to September.
Governor Andrew Bailey said last weekend that the Bank of England would “have to act” in response to surging prices. He said he continues to “believe that higher inflation will be temporary,” but conceded it could last longer than previously thought as a result of energy price hikes.

By Walé Azeez

Source: CNN Business