05 Aug 2022
Monthly UK Economic Outlook: August
Our economists share their views on the key economic trends to watch in the month ahead.
Economic conditions are worsening amid a squeeze in real incomes and tighter monetary policy – but there are signs of some respite on the horizon. For the moment, all eyes are on monetary policy. The Bank of England hiked the Bank Rate by 50 basis points at its meeting in August and signalled a tough economic environment through 2023. In the months ahead, it will have the unenviable task of trying to manage an increasingly delicate balance between growth and inflation.
Weakening economic growth as incomes get squeezed
Economic output rebounded in May, supported by broad-based increases in key sectors. But consumer facing services declined amid worsening of real income squeeze.
We think the data will show output declines in Q2 as consumers pull back on discretionary spending. CHAPS card spending data, a good lead indicator for growth across a range of consumer-facing sectors, is down 3% in June (see chart below). Additionally, around 25% of UK firms surveyed at the beginning of June reported lower turnover – a small increase over the previous month (20% of firms).
UK CHAPS Card Spend data
Source: NatWest
Despite a thriftier consumer and softer business growth, surveys show uncertainty related to Covid and Brexit reducing for firms; this might pave the way for an improving investment climate. The balance sheets of many households and corporates remain in healthy shape, helping to cushion some of the inflation shock.
No meaningful retreat in UK inflation until Q2 next year, but some early signs of stabilisation
We don’t expect prices to climb down from record heights anytime soon, but core price pressures are showing some signs of stabilising.
Core price inflation (CPI) hit 9.4% in June, a 40-year high driven mainly by food and petrol. With another energy price cap hike (65%) coming in October, we expect higher prices to last well into next year. The Bank of England now expects inflation to peak around 13%.
But core price pressures have edged down for two months straight. Weaker consumer demand amid higher supply prices is eating into margins. While that’s bad news for firms, it’s a positive for the inflation outlook. At the same time, falling commodity prices globally should also relieve pressure, along with pressure on global supply chains.
UK Inflation expectations: year-on-year % change
Sources: Bank of England, NatWest
Robust labour market conditions, but a softer outlook eases some tightening
Labour markets look strong heading into August, but that may start to change as the economic outlook sours. The unemployment rate retreated to pre-pandemic levels while redundancies reached record lows (3.8%) in May; that month, the UK workforce saw the highest rise since January 1984 – and could rise further still amid waning pandemic effects.
As economic growth softens, however, we expect rising labour supply and easing demand to cool wage pressures. We also think the unemployment rate may start to tick up from historic lows over the next few quarters.
Unemployment Rate vs. Redundancies: 3-month moving average
Sources: Office for National Statistics, NatWest
The Bank of England has a difficult task amid a worsening outlook
With the August Bank of England meeting now out of the way (it hiked the Bank Rate by 50bp), all eyes are on the future path for rates – and that looks less certain. Markets are pricing in a peak Bank Rate of 2.75% by early 2023 but economists and analysts think 2% will be enough to contain inflation over the medium-term. Some believe rates can go as high as 3%, assuming no further policy support (but that looks unlikely).
Still, the gulf between markets and economists on this speaks to the scale of uncertainty around the economy outlook – and the difficulty of the Bank’s task of raising rates even as growth slows well through next year.
Markets are beginning to consider the downside risks. Rate cuts are starting to be priced in for as soon as the end of 2023, a trend mirrored in the US.
UK Bank Rate forecasts
Sources: Bloomberg, NatWest
This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes. It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.
This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.
NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in the Netherlands, authorised and regulated by De Nederlandsche Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, the Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, the Netherlands. Branch Reg No. in England BR001029. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.
Copyright 2022 © NatWest Markets Plc. All rights reserved.
Posted in:
Keywords:
Latest insights
![](/content/dam/rbsinternational_com/assets/images/hero/palm-leaf-res-hero-rbsi.jpg)
Series 3, Episode 5: Avoiding financing ourselves into extinction
We’re joined by guest Andrew Mitchell, Vice Chair of the TNFD, the task force on nature related financial disclosures and the founder and CEO of Equilibrium Futures, to discuss the risk to nature and biodiversity and the important role the finance industry plays.
30 Jul 2024
![](/content/dam/rbsinternational_com/assets/images/article/tds-conf-mark-crathern-rbsi.jpg)
Securing the Future of the Funds Industry
There is nothing permanent except change, as attendees heard at the recent Fund Governance 2024 conference, hosted by NatWest Trustee & Depositary Services.
29 May 2024
![](/content/dam/rbsinternational_com/assets/images/hero/windfarm-at-sunset-hero-rbsi.jpg)
Funding emerging green technologies: opportunities and challenges
A recent roundtable discussion with RBS International's clients revealed while there is appetite to invest in transition energy and emerging technologies, concerns over scalability, risk and near-term returns are causing investors to approach with caution.
23 May 2024