UK recession now on the economic horizon
|Summary
- While the U.K. economy showed some resilience at the start of 2022, there are increasing signs that a more meaningful slowdown is approaching. Elevated inflation should contribute to declining real incomes, weighing on consumer spending and overall GDP. With the U.S. economy, in our view, now expected to fall into recession in 2023, we also expect the U.K. to experience an economic recession by early next year.
- Activity indicators for the second quarter suggest that a slowdown might already be underway. Activity data on retail sales, the service sector and overall GDP, along with recent confidence surveys, all hint at U.K. economic contraction in Q2 2022.
- Still even with this uncertain outlook, intensifying inflation pressures suggest the Bank of England will need to continue with its monetary tightening cycle for a while yet. We expect a steady series of 25 bps policy rate increases at upcoming meetings in August, September and November, which would lift the policy rate to 2.00%. Eventually, once the U.K. economy stumbles and inflation recedes, we expect the Bank of England to beginning lower interest rates by late 2023.
- Overall, this mix of measured monetary tightening and rapid inflation, combined with a U.K. economic downturn, provides an underwhelming backdrop for the U.K. currency. We have revised our forecast for the pound lower, and now see a trough in the GBP/USD exchange rate around $1.1700 in mid-2023.
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