The UK economy grew 0.8% q/q in Q1 2022, taking GDP 0.7% above its pre-Covid level of Q4 2019 but falling short of the 1% expansion expected. Since the ONS also publishes monthly GDP figures, it is possible to see how the economy fared over the course of the quarter. After a positive January (+0.7% m/m), output was flat in February (growth of 0% m/m as opposed to the initial estimate of +0.1%), and GDP even contracted slightly in March (-0.1% m/m). Although Q1 GDP was disappointing, its composition is also worrying looking ahead.
Faced with multiple pressures on prices, the United Kingdom has seen a sharp increase in inflation; CPIH hit 6.2% in March[1]. For households, this acceleration has resulted in a considerable deterioration in purchasing power. In real terms – that is, inflation-adjusted – the trend in wages was clearly negative (-1%) year-on-year in February 2022. However, bonus payments have offset this reduction, with wages including bonuses rising slightly (0.4%). The abrupt slowdown in real wage increases over little more than a year (in spring 2021, they were growing at 6%) has resulted in a collapse in consumer confidence, which in April fell to a near-record low of -38 points on the GfK index, close to the low point during the economic and financial crisis of 2008
The impact on Serbia’s economy caused by the war in Ukraine is likely to remain moderate. However, the war will adversely affect all macroeconomic indicators. Growth forecasts have been downgraded because of sharply higher inflation, trade exposure to Russia and a weaker European economy. Serbia’s central bank has carried out only moderate monetary tightening so far, expecting that the jump in inflation will be short-lived. External accounts are likely to deteriorate because of the wider current account deficit and a possible slowdown in foreign direct investment flows, but the central bank should still be able to defend the dinar stability. This is crucial for Serbia’s macroeconomic stability given that commercial bank balance sheets and government debt are highly exposed to the euro
Economic growth strengthened over the first two months of 2022, but is likely to slow in the near future due to inflationary pressures. Industrial production rose 3.6% year-on-year (y/y) in February, suggesting that economic activity picked up in Q1 2022 (provided that this rise continued into March) relative to Q4 2021. In services, the business climate has improved continuously since Q3 2021, taking the PMI to 62.6 in February 2022. Meanwhile, retail sales rose 15% y/y in February, confirming the recovery that began in late 2021.
The time has passed for unlimited fiscal and monetary support in the UK, and priority is now being given to reducing deficits and lowering inflation. To counter the shock triggered by Russia’s invasion of Ukraine, which promises to further increase the energy and food bills of UK households, the government’s measures to boost purchasing power seem to be rather mild so far. Consequently, we foresee a significant economic slowdown in 2022.
The UK is by no means the country with the greatest trade exposure to Russia: it buys virtually no Russian gas and in 2019, sent only 0.7% of its goods exports there (compared to 2% for Germany, for instance). Even so, in the UK, as in the whole of Europe, sanctions and shortages resulting from Russia’s war in Ukraine will increase inflationary pressures and damage economic prospects. The Office for Budget Responsibility (OBR) has cut its growth forecast for 2022 from 6% to 3.8%, whilst inflation could climb from 6.2% in February to a peak of 9% by the year end.
In the UK, like elsewhere, the upsurge in inflation is proving a constant source of surprise, and is prompting the central bank to act. Annual inflation is currently over 5% and the Monetary Policy Committee (MPC) expects it to hit 7% in April, its highest level for three decades. In response, the Bank of England is raising interest rates. Set at 0.1% during the crisis, its base rate was raised to 0.25% in December and then by a further quarter-point in February. Further rate hikes will follow, since the MPC, in line with market expectations, is aiming to increase the base rate to 1.50% by mid-2023.
The Turkish monetary & exchange rate policy in times of financial instability: economic rationale and consequences.
One year after the UK’s effective withdrawal from the EU Single Market, the balance of opinions about the country’s new solo adventure has never been so negative (50% of the population believe that it was a bad decision; only 38% think the opposite, with 12% not offering an opinion). Although the shock of the Covid-19 pandemic makes analysis harder, the costs of Brexit are clear in a number of trends, starting with figures for international trade.
To raise or not to raise interest rates? That is the question facing the Bank of England as inflation accelerates and the number of Covid-19 cases surges again, this time with Omicron, the new Covid-19 “variant of concern”. After rebounding strongly through summer 2021, economic growth has also lost the support of public spending, and is showing a few signs of levelling off.
Faced with the Covid-19 pandemic, Norway managed to minimise the human toll as well as its economic losses. In 2021, the country largely benefited from the rebound in natural gas and oil prices. Activity has already exceeded pre-pandemic levels, the housing market is booming, and the public accounts have swung back into their usual surpluses. One of the very first central banks to raise its key rates, Norges Bank esteems that the current situation is in keeping with the normalisation of monetary policy. Yet the roadmap still depends on the health situation, which like elsewhere in the world, is deteriorating.
Over the past 15 days, the Turkish lira has depreciated 21% against the euro, including a single-day decline of more than 10% on 23 November. At the same time, 10-year government bond yields have risen above the 20% threshold. This bout of weakness was triggered by 1) another cut in the central bank’s key rate on 19 November, from 16% to 15%, despite surging inflation, which reached 19.9% year-on-year in October, and 2) President Erdogan’s statements justifying the easing of monetary policy as part of a new economic policy, after the President demanded that the National Security Council declare an “economic war of independence”. The President also lashed out at the opportunistic speculative behaviour that took advantage of the lira’s depreciation to raise prices
Although there was no lack of effort from the British government in dealing with the coronavirus pandemic (20 points of GDP was directly transferred to the economy to tackle the health crisis, twice the European average), it was also one of the first to have decreed the end of “whatever it takes”. In October, the main employment support measures – the Coronavirus Job Retention Scheme and the Self-Employed Income Support Scheme – came to an end.
Did the UK government lower its guard too quickly? Since early July, it has lifted nearly all of the sanitary barriers to counter the Covid-19 pandemic. London no longer requires masks to be worn in public spaces, even indoors, nor the presentation of a “health pass”. These measures are left to the discretion of each individual. As a result, the “freest country in Europe”, according to UK minister David Frost, is also the one that reported the highest number of new cases in fall 2021: nearly 45,000 new cases a day. This is ten times more than in France, while the two countries have comparable populations and vaccination rates (67% altogether).
Turkey is enjoying strong economic growth in 2021, following the credit-driven stimulus implemented in 2020. The cumulative performance over 2020 and 2021 has allowed the country to close the growth gap that resulted from the series of shocks between 2018 and 2020. Investment and the industrial sector have thus regained their previous size. Foreign currency reserves have recovered from the low levels they reached in 2020. Nevertheless, this has come at a price: inflation is running well ahead of levels seen in other emerging economies. As well as common factors (rising prices for oil and other commodities), there are specific country drivers (depreciation of the lira, untimely monetary policy decisions)
After paying a heavy toll to the Covid 19 pandemic, the UK is getting back on its feet. Now that more than 80% of the adult population has been vaccinated, the UK economy was able to reopen for business this summer and to operate almost normally despite the spread of the highly contagious Delta variant. Just as the recovery is running up against supply-side constraints, the government of Boris Johnson is removing fiscal support measures as it proclaims the end of “whatever the cost”. Euphoric so far, the recovery should calm down somewhat by the end of the year.
Inflation largely surpassed expectations at 3.2% year-on-year, the highest level since 2012, and well above the Bank of England’s official target of 2%. As a result, BoE Governor Andrew Bailey must officially explain why inflation is above target and whether the situation will last.
The Banker’s rankings of the UK’s five largest banking groups by Tier 1 capital – HSBC, Barclays, NatWest (formerly RBS), Lloyds and Standard Chartered – have generally declined since 2013. This trend, which was initially in step with all of the largest European banks, mainly due to differences in growth rates between geographic regions, has been even sharper in the UK since the vote for Brexit in 2016. HSBC almost maintained its ranking, thanks to its geographic diversification. The decline in the rankings of the UK banks can be attributed to the absolute decline in Tier 1 capital (-12.6% between 2013 and 2020), but also to the increase in the Tier 1 capital of the other largest euro area banks (+29.6%)
With nearly 35,000 new daily cases reported last week, the Covid-19 virus is gaining ground again in the UK. There is an encouraging sign, however, that proves the effectiveness of the vaccine: the number of severe cases seems to be increasing much less rapidly than during previous waves.
The Serbian economy was only moderately affected by the consequences of the Covid-19 pandemic in 2020. Activity barely contracted, whilst the central bank maintained an adequate level of foreign-currency liquidity against a background of significant euroisation of the economy. These good performances can be linked to the economy’s attractiveness for international investors, as well as to past fiscal consolidation measures, which meant that the government had more scope to support the economy last year. In the short term, the recovery is likely to be strong, in particular thanks to exports, and inflation should remain under control. Looking further ahead, the ability of the authorities to maintain the economy’s competitiveness will be crucial in reducing currency risk.
No sooner had the divorce agreement with the European Union been signed than the UK started disputing its terms. On 16 March, the British government was formally notified by the European Union for breaches of the Protocol on Ireland and Northern Ireland and violation of the duty of good faith. The final outcome, which can include sanctions, is yet to be decided. The fact remains that Brexit, described as a “historic mistake” by the remaining 27 members of the EU, appears as nothing more or less than what it is: a clear break. Admittedly, it will not stop the UK economy from recovering
The very accommodative policies implemented by the Federal Council and the Swiss National Bank have been very successful in limiting the economic consequences of the pandemic. In 2020, economic activity contracted by 3%. The latest business cycle indicators point to a strong rebound in the second half of the year. The recovery is broad-based. Private consumption will be one of the main engines of growth, as households will spend part of the savings accumulated during the crisis. The breakdown of the negotiations between the Swiss Confederation and the EU, and the possible introduction of a global minimum corporation tax rate are likely to undermine the country’s competitiveness in the medium term.
Largely spared by the Covid-19 pandemic, Norway reported one of the mildest recessions in Europe in 2020 (-2.5%). The economy is poised for a vigorous recovery in the second half, driven by the acceleration of global trade and the rebound in household consumption. In the light of these favourable prospects, and concerned about the acceleration in house prices, Norges Bank intends to begin raising its key rate gradually as of September, even though core inflation is low.
The double whammy of Brexit and the health crisis has hit the economy hard. In 2020, GDP contracted by 9.8%, the weakest performance by a G7 country and the UK’s worst year since 1920. In the first quarter of 2021, GDP fell by a further 1.5%, due to lockdown measures introduced to tackle the second wave of the epidemic and despite considerable fiscal support
