Assessing the State of the British Economy: Insights from Macroeconomic Readings and the BoE's Dilemma on Rate Hikes
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Recent macroeconomic readings, including data on wages, GDP, and industrial production, have provided valuable insights into the current state of the British economy. These key indicators offer crucial information about the depth of the potential recession and the future course of action for the Bank of England (BoE). To shed light on these important developments, we reached out to Nick Cawley, Senior Strategist at DailyFX, for his expert analysis.
The persistent challenge faced by the BoE is the backdrop of persistently high inflation, which currently stands at 8.7%, well above the central bank's target of 2%. Simultaneously, the UK's economic growth remains lackluster, prompting the BoE to carefully assess the delicate balance between raising the borrowing rate to control inflation and avoiding a recession.
FXMAG.COM:
What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates?
Nick Cawley, Senior Strategist at DailyFX said:
This week's economic data continue to highlight the problems that the Bank of England (BoE) face. Against a backdrop of relentlessly high inflation - 8.7% against the central bank's 2% target – and tepid UK growth, the BoE will need to gauge how much further they can lift the borrowing rate without sparking a recession.
The UK labor market remains robust, although cooling, with wage growth near record levels last seen during the pandemic period. This week's data show the UK unemployment rate rising to 4% in April, from a prior month's 3.8%, a small positive for the BoE in its fight against inflation, but soaring wage growth will likely keep pressure on consumer prices.
The latest Office for National Statistics (ONS) data show UK GDP flatlining in the three months to May, and indeed UK growth has been fairly stagnant since the start of 2022, not helped in part by rising borrowing. While the UK has avoided a technical recession so far, the likelihood that UK GDP may turn negative in the coming months is growing.
Recent inflation and jobs data all but guarantee that the UK central bank will hike the Bank Rate by a further 50 basis points to 5.50% at the next monetary policy meeting on August 3rd. The question then is what happens at the next meeting in the economic calendar on September 21. Will inflation fall sharply, as suggested on many occasions by BoE governor Andrew Bailey, or will data show the accumulative effects of prior rate hikes is taking effect? Add into the mixture UK mortgage costs are hitting multi-year highs and the BoE have a testing few months ahead.
