UK Economic Outlook and Forecast
UK economy faces challenges and opportunities. Forex traders must understand inflation, fiscal consolidation, and geopolitical factors to predict market movements.
Welcome to this comprehensive report on the macroeconomic landscape of the United Kingdom, designed to provide forex traders with valuable insights and actionable intelligence. In this report, we delve into the key drivers shaping the UK economy, analysing the interplay of geopolitics, fiscal policy, economic performance, and monetary policy.
We will explore the recent rate cut by the Bank of England, the ongoing challenges of inflation, and the potential for social unrest amid a cost-of-living crisis. We will also examine the UK's trade relationships in the post-Brexit era and the impact of the ongoing conflict in Ukraine on the UK economy.
To ensure clarity and context, this report utilises specific timeframes for analysis:
Near-term: A five-day outlook.
Short-term: A six-week outlook.
Mid-term: A six-month outlook.
Long-term: A five-year outlook.
By understanding the forces shaping the UK's macroeconomic landscape, forex traders can make more informed trading decisions and capitalise on emerging opportunities.
Friday, August 23, Week 34
Geopolitics: A Sea of Uncertainty
The geopolitical landscape surrounding the United Kingdom is complex, presenting both opportunities and challenges for the nation's economy.
The ongoing conflict between Russia and Ukraine continues to cast a long shadow over Europe. The UK, a staunch supporter of Ukraine, faces heightened tensions with Russia, which has engaged in hybrid warfare tactics against Western nations. The UK government has responded with sanctions on Russia and military and financial aid to Ukraine. However, the risk of escalation remains a concern for market traders, particularly as Western militaries consider sending advisors and military staff to Ukraine.
The aftermath of Brexit continues to shape the UK's relationship with the European Union, introducing new trade barriers and impacting economic relations. The new Labour government, while seeking closer relations and regulatory alignment with the EU, has not committed to a full reversal of Brexit. This ongoing negotiation process adds a layer of complexity to the UK's economic and political landscape.
Domestically, anti-immigration sentiment and the proliferation of far-right ideologies are on the rise, fueled by political polarisation and disinformation campaigns. Recent far-right riots, while unlikely to significantly destabilise the government in the short term, highlight the potential for social and political instability, a factor closely watched by market participants.
A Murky Horizon
In the short-term, the focus will shift to the upcoming parliamentary session, set to open no later than October 1st.
In the mid-term, the UK will need to navigate the ongoing tensions with Russia and the potential for escalation in the Ukraine conflict. Managing the economic and political consequences of Brexit, as well as addressing the underlying drivers of anti-immigration sentiment, will also be key priorities.
Fiscal Policy
The UK's fiscal policy is currently focused on balancing the need for fiscal consolidation with the demands of its coalition partners and the risk of social unrest. The new Labour government, having inherited a significant budgetary hole from the previous Conservative government, is under pressure to implement fiscal adjustment measures to reduce the country's budget deficit.
The government has announced plans to cut spending, raise taxes, and restore energy sector stability and efficiency. However, these measures may face resistance from coalition partners and the opposition, particularly given the potential for social unrest.
Fiscal Outlook
In the near-term, the government will likely prioritise finalising a new IMF deal to secure funding and avert default. This will involve implementing austerity measures, including tax increases and spending cuts.
In the short-term, the focus will shift to the upcoming budget deliberations, where the government will need to balance the need for fiscal consolidation with the demands of its coalition partners.
In the mid-term, the government will face the challenge of implementing more structural reforms, such as enhancing debt sustainability and privatising state-owned companies. These reforms, however, are likely to face significant political obstacles.
Economics
The UK economy presents a mixed picture, with both positive and negative trends. The economy has rebounded from the contraction experienced in the latter half of 2023, with GDP growth exceeding expectations in the first half of 2024. Consumer confidence is also on the rise, fueled by a recovery in real incomes.
However, underlying momentum in activity appears weaker than headline GDP growth suggests. The economy faces headwinds, including high inflation, rising interest rates, and persistent labour market tightness.
The Bank of England, in its August 2024 Monetary Policy Report, highlighted the challenges of wage and price pressures: "Japan's real wages rose for the first time in 27 months in July, growing 1.1%. This was partly due to recent labour negotiations and company efforts to attract labour in a tight market. Labour ministry polls from July show that 59.6% of households say rising prices are making life difficult, an increase of 8.3 percentage points from last year."
Navigating Headwinds
In the near-term, the economy is likely to continue growing, but at a slower pace. Consumer spending may remain subdued as households grapple with the rising cost of living.
In the short-term, the economy will face the challenge of adjusting to higher interest rates and tighter monetary policy. This is likely to weigh on business investment and housing market activity.
In the mid-term, the economic outlook will depend on a number of factors, including the evolution of inflation, the pace of interest rate adjustments, and the government's success in implementing its fiscal consolidation plan.
Monetary Policy
The Bank of England's monetary policy is focused on bringing inflation back to its 2% target sustainably. The Bank has raised interest rates aggressively over the past year and a half, and in its August meeting, it lowered the Bank Rate by 25bps to 5%, the first cut in over a year.
The Bank has signalled that it will continue to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting. The Bank has also commenced a program of quantitative tightening, reducing the stock of assets held in its Asset Purchase Facility.
Staying the Course
In the near-term, the Bank of England is expected to maintain its current monetary policy stance, keeping interest rates at 5%. The Bank will continue to monitor incoming economic data, particularly inflation and wage growth.
In the short-term, the Bank will need to decide on the appropriate pace of further interest rate adjustments. This will depend on the evolution of inflation and the strength of the economy.
In the mid-term, the Bank will need to manage the process of unwinding its quantitative easing program, while also ensuring that monetary policy remains supportive of economic growth.
The Macroeconomic Outlook
The UK's macroeconomic outlook is clouded by a number of uncertainties, including the ongoing geopolitical tensions, the government's fiscal consolidation plan, and the path of monetary policy.
The Bank of England's August Monetary Policy Report projects that the economy will continue to grow over the forecast period, albeit at a slower pace than in recent years. Inflation is expected to fall back to the 2% target in the medium term, but the risks to the inflation outlook are skewed somewhat to the upside.
Macroeconomic Outlook
In the near-term, the economy is likely to continue growing, supported by a potential recovery in consumer spending and a pickup in business investment. However, the risks to the outlook are tilted to the downside, reflecting the potential for further geopolitical tensions, a sharper-than-expected slowdown in global growth, or a more persistent rise in inflation.
In the short-term, the economy will face the challenge of adjusting to higher interest rates and tighter monetary policy. This is likely to weigh on growth, but the Bank of England is expected to adjust interest rates gradually over the forecast period, providing some support to the economy.
In the mid-term, the outlook for the economy will depend on a number of factors, including the success of the government's fiscal consolidation plan, the evolution of Brexit, and the pace of technological change.
Risks to the Outlook: Navigating a Turbulent Sea
The UK's macroeconomic outlook is subject to a number of risks, both domestic and external.
Domestic risks include:
A sharper-than-expected slowdown in consumer spending: High inflation and the potential for further interest rate rises could weigh more heavily on consumer confidence and spending than anticipated.
A weaker-than-expected recovery in business investment: Uncertainty surrounding Brexit and the global economic outlook could deter businesses from investing.
External risks include:
A further escalation of geopolitical tensions: The conflict in Ukraine could escalate, leading to wider economic sanctions and disruptions to energy supplies.
A sharp slowdown in global growth: The global economy is facing a number of headwinds, including high inflation, rising interest rates, and supply chain disruptions. A sharp slowdown in global growth would have a negative impact on the UK economy.
A surge in commodity prices: A further surge in commodity prices, particularly energy prices, would add to inflationary pressures and weigh on economic growth.
Economic Indicators of the United Kingdom
Economic Growth:
Monthly GDP MoM: Stalled in June at 0.00%, matching forecasts. Expected to be 0.20% by the end of the quarter. In the long term, projected to trend around 0.30% in 2025.
GDP Growth Rate QoQ: Expanded 0.60% in Q2 2024, in line with forecasts. Projected to be 0.70% by the end of the quarter.
GDP Annual Growth Rate: Expanded 0.90% year-on-year in Q2 2024, matching market forecasts.
Price Changes (Inflation):
Inflation Rate YoY: Increased to 2.20% in July from 2.00% in June. Expected to remain at 2.20% by the end of the quarter. In the long term, projected to trend around 1.70% in 2025.
Core Inflation Rate YoY: Fell to 3.30% in July 2024, the lowest level since September 2021.
Labour:
Unemployment Rate: Decreased to 4.20% in June from 4.40% in May. Expected to be 4.60% by the end of the quarter. In the long term, projected to trend around 5.20% in 2025.
Average Weekly Earnings Growth: Increased 4.50% in June 2024 over the same month in the previous year.
Employment Change: Increased by 97 thousand in the three months to June 2024.
Housing:
Nationwide Housing Prices YoY: Rose by 2.10% year-on-year in July 2024, surpassing market expectations.
Halifax House Price Index YoY: Rose by 2.30% year-on-year in July 2024, marking the sharpest annual growth since January.
Mortgage Approvals: Eased slightly to 59.98 thousand in June of 2024.
Mortgage Lending: Jumped to £2.65 billion in June of 2024, the most since November 2022.
Business Confidence:
CBI Business Optimism Index: Declined to -9 in July 2024 from 9 in April.
CBI Industrial Trends Orders: Declined to -32 in July 2024 from -18 in June.
Manufacturing PMI: Revised higher to 52.1 in July 2024, marking the sharpest expansion since July 2022.
Consumer Sentiment:
GfK Consumer Confidence: Rose to -13 in July 2024 from -14 in June, improving for the fourth consecutive month.
Trade:
Current Account: The current account gap in the UK slightly declined to £21 billion, equivalent to 3.1% of GDP, in Q1 of 2024.
Goods Trade Balance: Increased to £-18.89 billion in June 2024, from a revised £-18.59 billion in the prior month.
Goods Trade Balance Non-EU: Declined slightly to £-7.46 billion in June 2024, from a revised £-7.65 billion in the prior month.
Retail Sales MoM: Increased 0.50% in July of 2024 over the previous month.
Retail Sales YoY: Increased 1.40% year-on-year in July of 2024.
CBI Distributive Trades: Fell to -43 in July 2024 from -24 in June.
BRC Retail Sales Monitor YoY: Rose 0.30% on a like-for-like basis in July 2024 from a year ago.
These indicators suggest that the UK economy is currently in a state of flux, with both positive and negative trends at play. The short-term and mid-term outlook will depend on how these trends develop, and on the policy responses of the government and the Bank of England.
Conclusion: Steering Through Uncertainties
The UK economy is at a crossroads, facing a confluence of challenges and opportunities. The recent rate cut by the Bank of England, while signalling a cautious pivot towards supporting growth, highlights the ongoing battle against inflation. The government's fiscal consolidation plan, while necessary to address the budget deficit, risks exacerbating social unrest amid a cost-of-living crisis. The geopolitical landscape, marked by the conflict in Ukraine and the aftermath of Brexit, adds further complexity to the outlook.
Navigating this complex landscape requires a keen understanding of the interplay between these factors. By closely monitoring economic indicators, central bank communications, and geopolitical developments, forex traders can gain a valuable edge in anticipating market movements and making informed trading decisions.
Sources
Bank of England
Office for National Statistics
Trading Economics
BRC - British Retail Consortium
Confederation of British Industry
GfK Group
S&P Global
Nationwide Building Society
Office for Budget Responsibility
Eurostat
US Bureau of Labor Statistics