New forecasts indicate that the UK is poised to have one of the weakest economic performances among advanced economies in the current year and the following year. The Organisation for Economic Cooperation and Development (OECD) has projected that while Britain’s economic growth this year will outpace Germany and Argentina, it is expected to lag behind all other advanced nations.
The concerning forecast is compounded by former Bank of England governor Mark Carney’s criticism of the 49-day Prime Minister, Liz Truss. Carney accused her of transforming Britain into “Argentina on the Channel,” attributing this to her fundamental misunderstanding of the factors that propel economies.
UK’s inflation fell more than expected
The OECD has projected that Britain is on track to experience the highest inflation rate among the G7 countries, which includes the United States, Canada, France, Germany, Italy, and Japan. In recent reports, UK inflation actually decreased to 6.7% in August despite a significant surge in fuel prices for motorists. That has alleviated pressure on the Bank of England to implement interest rate hikes.
Economists had anticipated an uptick in inflation due to the global increase in energy prices. While the rise in fuel costs contributed to inflation, it was counterbalanced by slower upticks in food prices and a monthly drop in hotel accommodations.
Given the volatility and international nature of energy prices, policymakers are also closely monitoring other inflation indicators to gauge the extent to which price growth has become ingrained in the economy.
A crucial measure of domestic price pressures is core inflation, which excludes energy and food expenses. The yearly core inflation rate dropped to 6.2 percent in the previous month, down from July’s 6.9 percent, a more rapid decline than economists had anticipated. This decline was primarily attributed to a deceleration in services inflation, another significant metric as it reflects the labor costs of companies—wages being a consistent driver of inflation.
As a result, there have been mixed responses. Chancellor Jeremy Hunt stated that the latest inflation figures indicate the government’s strategy is yielding results. He added that it remains unacceptably high, underscoring the imperative to adhere to our plan to cut it in half, thus alleviating the strain on families and businesses. Hunt added that that is the only route to achieving sustainability and higher growth.
Rachel Reeves, the shadow chancellor, countered, asserting that the prime minister lacks the strength to reverse the situation. She also criticized his predecessor, Liz Truss, for advocating the policies that led to an economic downturn last year.
The plan to halve inflation
As household finances have been strained by surging energy costs, grocery prices, and other expenditures, the data released on Wednesday provides some reassurance that inflation is showing signs of easing. The headline inflation rate had significantly decelerated from its peak in October when it surpassed 11 percent.
Although Prime Minister Rishi Sunak pledged to cut inflation in half this year, a target he is currently on course to achieve, the pace of price growth remains uncomfortably high, prompting a cautious approach from the government.
Despite progress in alleviating price pressures in many nations, central bankers remain cautious about prematurely declaring victory, given that inflation rates still exceed their targets. Last month, rising energy costs contributed to an uptick in the United States and increased inflationary pressures in various European countries.
However, it’s noteworthy that the headline inflation rate in Britain still surpasses that of the United States, where prices increased by 3.7 percent in August, and the eurozone which experienced an average price growth of 5.2 percent among the 20 countries using the euro. While some disparities can be attributed to how these nations respond to fluctuations in wholesale energy prices, there are indications that inflation is exhibiting greater persistence in Britain. Additionally, core inflation is higher in the UK, partly due to unexpectedly brisk wage growth in the private sector stemming from a tight labor market.
Pound Sterling falls
The Pound Sterling saw a decline against major currencies early on Wednesday in response to softer-than-expected August inflation data from the UK. As a result of this immediate reaction to the inflation figures, GBP/USD dropped to its lowest level since late May, falling below 1.2350. This trend was also reflected in other pairings, with EUR/GBP surging to a six-week high above 0.8650 and GBP/JPY experiencing a drop of over 50 pips, falling below 183.00.
Amit Trivedi, a forex analyst and trader based in the UAE, noted that the exchange rate of the British pound (GBP) has been on a downward trajectory since the beginning of the year. This trend has likely incentivized remittances and overseas transactions. Trivedi also pointed out that the pound’s exchange rate against the US dollar is currently nearing the lower end of its historical trading range, which has also contributed to its decline against the UAE dirham.
Analysts at the Dutch multinational bank ING anticipate the pound’s exchange rate to reach 1.27 within three months, with a 12-month forecast of 1.34. They attribute the depreciation of the pound to pressure on the US dollar.
Furthermore, the yield, or interest rate, on UK government bonds has also experienced a decrease. That comes as investors revise their expectations for how high UK interest rates will rise. This development could benefit individuals seeking to remortgage in the upcoming months, as the yield on two-year UK bonds is a determining factor in pricing these home loans.
