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Fiscal adjustment and public investment: the difficult balancing act of the UK Budget
11/14/2024 • By Guillaume DERRIEN

The Autumn Budget, unveiled by Rachel Reeves on October 30th, attempts to reconcile fiscal adjustment, support for public services and strengthening of UK’s potential growth.

Eco Pulse

United Kingdom | Not so bad
10/31/2024 • By Guillaume DERRIEN

While manufacturing activity in the United Kingdom, like elsewhere in Europe, is in a difficult state, the situation is less worrying across the Channel. Industrial production rose by 1.1% m/m in August, returning to its April levels. The year-on-year fall in output has almost completely subsided (-0.3% y/y). This situation is in line with the manufacturing PMI for October, which was down on the previous month (-1.2 points, to 50.3), but is still in expansion territory. The services PMI fell by 0.6 points to 51.8, and therefore also contributed to the decline in the composite index, which dropped by 0.9 points to 51.7 in October.

Eco Perspectives

United Kingdom | Striking the right balance between growth and fiscal consolidation.
10/09/2024 • By Guillaume DERRIEN

The presentation of the budget on 30 October will be the first real test for Rachel Reeves. The deteriorating situation of the public accounts and the September 2022 mini-budget crisis, which is on everyone's minds, are leaving the Chancellor of the Exchequer with little room for manoeuvre. UK growth is expected to slow in the second half of 2024 (+0.3% quarter-on-quarter). The two policy rate cuts by the Bank of England (BoE) that we expect in 2024 (August and November) would enable growth to come close to its potential level during this year and in 2025.

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United Kingdom: a deceptive upturn in activity
09/12/2024 • By Guillaume DERRIEN

Growth and inflation figures in the UK have surprised favourably since the beginning of the year. These results are of course welcome, but they do not reflect a genuine recovery in the economic situation across the Channel.

Charts of the Week

Housing shortage, a major challenge for the Labour Party

07/25/2024 • By Guillaume DERRIEN

The newly elected Labour Party has set a target of 1,500,000 extra homes in five years, or 300,000 a year, in an attempt to stem the crisis in England's housing sector. This is not a new figure; it was already the one put forward in the Conservative Party manifesto when Boris Johnson was elected in 2019.

Eco Pulse

United Kingdom | A fragile upturn
07/19/2024 • By Guillaume DERRIEN

The rise in activity is welcome news for the recently elected Labour Party. According to the ONS, the monthly figures for real GDP (or, to be more precise, real value added) show that UK activity rose by 0.4% m/m in May, following a levelling-off in April. Although the manufacturing sector (+0.4% m/m) and construction (+1.9% m/m) were more supportive of growth than services (+0.3% m/m) in May, it is the latter that have been driving activity over the past year, with a rebound in transport and logistics (+7.3% y/y) and a clear acceleration in ‘professional, scientific and technical’ activities (+4.1% y/y).

Eco Perspectives

United Kingdom | UK households remain under pressure
07/02/2024 • By Guillaume DERRIEN

The party that wins the general election on 4 July will inherit an economy running out of steam. The scenario of a slowdown in growth in Q2 (+0.2% q/q), and over 2024 as a whole, remains our central forecast. Surveys data (PMI, GfK consumer confidence index) and investment have recovered, but household consumption remains depressed. While disinflation supports purchasing power, rising unemployment and the persistence of high interest and savings rates are limiting its effects. The rise in mortgage payment arrears indicates that the refinancing shock is continuing to spread. The return of inflation to 2% in May will support the Bank of England in its decision to initiate a first cut in key rates in August, according to our forecasts, which will give households (little) breathing space.

Eco Pulse

United Kingdom | Sluggishness still reigns
05/31/2024 • By Guillaume DERRIEN

The preliminary growth estimate for Q1 has not dispelled doubts about the state of domestic demand in the UK. Although inflation has fallen and real wages and household confidence have improved, British consumers are still cautious. Household consumption rose only by 0.2% q/q in Q1, offsetting a small part of the contraction recorded in the previous two quarters (-1.0% cumulatively). In addition, retail sales surprised on the downside in April, falling by 2.3% m/m in volume, following a slight drop in March (-0.1% m/m). Real GDP rose by 0.6% q/q in Q1, underpinned by positive net exports. However, the underlying dynamic was disappointing, as import volumes fell more sharply than exports.

Eco Perspectives

United Kingdom | The interest rate shock continues to spread
04/17/2024 • By Guillaume DERRIEN

The economic outlook in the UK is still challenging. After a year 2023 marked by a gradual deterioration in activity (a slowdown in the first half of the year, followed by a contraction in the second half), GDP growth is expected to remain slightly positive in 2024. With the general election, scheduled to be held at the end of the year, Prime Minister Rishi Sunak, who is facing difficulties within the Conservative party, is struggling to reassure households who are bearing the full brunt of rising costs of living and interest rates. Despite a recovery in purchasing power and the resilience in the labour market, private consumption remains depressed

Eco Pulse

United Kingdom | A slight improvement
03/29/2024 • By Guillaume DERRIEN

The UK economy remains deteriorated, but the latest activity figures show a slight improvement at the beginning of 2024. The monthly ONS estimate indicates growth in added value of 0.2% m/m in January, buoyed by a rebound in retail and wholesale (+1.8% m/m) and construction (+1.1% m/m). Nevertheless, this follows a difficult second half of 2023, marked by a 0.5% drop in real GDP.

Eco Pulse

United Kingdom : still facing a difficult situation
03/05/2024 • By Guillaume DERRIEN

The economic situation in the UK continued to deteriorate in Q4 2023. Real GDP contracted 0.3% q/q, after falling 0.1% q/q in Q3. Although economic activity remained marginally in positive territory for 2023 as a whole (with 0.1% growth), it deteriorated throughout the year, resulting in a negative carry-over effect for 2024. The growth outlook for 2024 is even more unfavourable, as economic activity is expected to stagnate in H1 before a sluggish recovery from summer onwards.

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United Kingdom: a Spring budget with no room for maneuver
02/22/2024 • By Guillaume DERRIEN

Jeremy Hunt's announcement of the Spring Budget on 6 March will once again be a balancing act for the British Chancellor of the Exchequer. He has the difficult task of supporting an economy whose activity is stalling and investment needs are increasing, while trying to reverse the trajectory of the public deficit, which widened in 2023.

Eco Perspectives

United Kingdom: In search of a second wind
02/01/2024 • By Guillaume DERRIEN

The UK economy is flirting with recession. The downturn in activity in the second half of 2023 is expected to continue until spring 2024 before an expected sluggish recovery, which nonetheless will be supported by the Bank of England (BoE) beginning its monetary easing cycle. Despite an uptick in December 2023, inflation remains on its downward trajectory, which is clearly reflected in production prices and CBI surveys. The turnaround in the labour market, which is still muted, is helping to reduce upward pressures on wages. While this is good news for inflationary momentum, it is also weakening private consumption. The BoE has little room for manoeuvre, with an initial policy rate cut expected to occur in June 2024

Eco Pulse

United Kingdom: Growth relapses, the housing market stabilizes
12/22/2023 • By Guillaume DERRIEN

With the more pronounced disinflation of consumer prices and wages, the Bank of England’s decision to keep the bank rates unchanged at its meeting on 14 December was widely expected. Nevertheless, as in the euro area, the signal for a monetary pivot did not come. In fact, the three members of the MPC in favour of a rate hike in November maintained their position in December.

Eco Pulse

United Kingdom: Improvement on the inflation front
11/24/2023 • By Guillaume DERRIEN

Consumer price inflation fell sharply in October, from 6.6% y/y in September to 4.6% y/y. Nevertheless, this decrease remains limited by the strong increase in wages, which continue to put upward pressure on services prices. A 5% increase in gas and electricity prices from 1 January has also been announced. In addition, the transmission of interest rates to mortgage interest payments remains significant (+50% between October 2022 and October 2023 according to the retail price index, RPI), and is weighing heavily on households’ financial situation.

Eco Pulse

UK: the labour market is deteriorating
10/20/2023 • By Guillaume DERRIEN

The UK labour market has reached a tipping point. For the Bank of England (BoE), in addition to the slowdown in the housing market, this is a further indication of the wider transmission of the rise in interest rates to the real economy. The ONS labour market report for September was postponed until October 24th. Nevertheless, data from the HMRC indicated an 8,360 drop in employees last month; this is the second consecutive monthly fall and a steeper decline than in the previous month (-5,071). Furthermore, the PMI employment indices fell sharply in September, pulled down by services (-3.3 points to 47.9), which slipped below the rate of expansion for the first time since the beginning of the year.

Eco Perspectives

United Kingdom: Clouds are gathering
10/13/2023 • By Guillaume DERRIEN

The UK economy shows increasing signs of deterioration. An upturn in unemployment is visible, and the PMI employment data fell sharpy in September. The consequences of monetary tightening are spreading and no sector has been spared; first and foremost, the housing market and even the public sector, recently shaken by the bankruptcy of several councils, including the city council of Birmingham, the country’s second largest city. While inflation in the UK is falling, it remains high compared to its European neighbours, notably due to stronger wage increases. However, the Bank of England is not expected to raise the Bank rate again, even though the vote in September (when a hike was expected) was decided by a single vote

Eco Pulse

United Kingdom: signs of deterioration are increasing
09/22/2023 • By Guillaume DERRIEN

Growth in Q2 2023 was a positive surprise, with an increase in real GDP of 0.2% q/q, driven by corporate investment, and in particular by spending on transport equipment. Nevertheless, signs of deterioration in activity are multiplying and extending to all sectors.

Eco Pulse

United Kingdom: Combatting inflation remains difficult
07/21/2023 • By Guillaume DERRIEN

The UK economy contracted in May (-0.1% m/m) according to the ONS, after growth of 0.2% m/m in April. The services sector stagnated, while industrial production and construction fell by 0.6% and 0.2% m/m respectively. According to the June PMI survey, activity increased in the services sector, but decreased in the manufacturing sector. While the extra bank holiday for King Charles III’s coronation probably contributed to the downturn in activity in May, the UK economy remains in a more extended slowdown phase. The economy stagnated indeed on average over 3 months in May.

Eco Perspectives

United Kingdom: a wave of inflation may well be hiding a second one

07/05/2023 • By Stéphane COLLIAC

GDP in the United Kingdom rose by 0.1% q/q in Q1 2023. The winter recession heralded in autumn 2022 did not materialise thanks to public investment, the momentum of services and the resilience of industry. This resilience is good news, but is likely to make inflation more persistent in the medium term, while the latest figures once again surprised on the upside. The Bank of England (BoE) will have to continue to raise interest rates. This will impact growth, which is likely to be zero in 2024, after already reaching just 0.4% in 2023.

Eco Pulse

United Kingdom: The Bank of England is flexing its muscles
06/23/2023 • By Stéphane COLLIAC

British economic activity recovered by 0.2% m/m in April. This recovery follows a 0.3% m/m contraction in March. This should be put into perspective since monthly GDP remains 0.1% below the level reached in January and February. The services sector returned to growth (+0.3% m/m) after two months of contraction.

Eco Flash

United Kingdom: Has Brexit truly made the UK less attractive economically?

06/15/2023 • By Stéphane COLLIAC

It is generally assumed that Brexit has made the United Kingdom less attractive economically. However, data on the balance of payments and foreign workers reveal that it’s not as simple as that.Granted, as recently as March 2023, one UK company out of four ranked Brexit as one of its top three concerns. While that number had fallen since 2019, it does show that concerns have not disappeared entirely.Real business investment (both foreign and domestic) in the UK was 0.4% lower in the fourth quarter of 2022 than in the second quarter 2016. However, this decline was not driven by weaker foreign direct investment (FDI) by non-residents in the UK, as this does not show up in the data.Brexit has had a more notable impact on workforce flows

EcoTV Week

UK considers review of deposit guarantee scheme
06/09/2023 • By Marianne MUELLER

The governor of the Bank of England announced last April a review of the British deposit guarantee scheme. A review was already under way to expedite the compensation of depositors in the event of bankruptcy.

Eco Pulse

United Kingdom: The storm has dissipated
05/30/2023 • By Stéphane COLLIAC

The UK economy grew 0.1% q/q during Q1 2023, at the same pace as during Q4 2022. Growth was erratic in the first quarter. Real GDP initially bounced back in January (+0.5% m/m) following a contraction in December (-0.5% m/m), buoyed by the services sector (+0.8% m/m).

Charts of the Week

Normalisation of monetary policy in the United Kingdom: the impact on mortgages

05/24/2023 • By Marianne MUELLER

The normalisation of the Bank of England’s (BoE) monetary policy, which began in December 2021, helped increase the cost of mortgages to households: it rose from an average of 1.5% in November 2021 to 4.4% in March 2023.

Until the UK voted to leave the European Union in June 2016, its economy was one of the fastest growing in the developed world. That was despite sluggish growth in the Eurozone, its main trading partner. Since then, however, output has grown at a moderate pace, weighed down by a slowdown in business investment, consumption, domestic demand, potential growth, capital accumulation, net migration from the EU, and productivity. That said, external demand and a weaker sterling supported exports until the Covid-19 crisis occurred.

Because the government waited before implementing restriction measures, the pandemic spread rapidly throughout the UK and the lockdown that was finally imposed was particularly long. The recession was extremely severe (GDP down 9.8% in 2020).

After a long and painful negotiation with the European Union (EU), the UK actually left the single market on 1st January 2021; achieving the so-called Brexit process. Although the EU and the UK managed to avoid customs duties, the return of non-tariff barriers dampened trade volumes. Besides, the UK has reached a wide range of bilateral deals with other trading part.