Having been through two ‘once in a lifetime’ economic shocks in just over a decade, businesses will be looking for certainty and investment support from policymakers.
Fiscal, monetary and inflationary impacts all raise uncertainties
To date, the UK recovery has been aided by very stimulative fiscal and monetary policies. While much of the COVID-19-related fiscal support has now ended, the extra public spending in October’s Budget will ease the fiscal tightening over the coming years. Meanwhile, the Monetary Policy Committee (MPC) chose not to raise interest rates in November, despite sounding increasingly hawkish. While the MPC could potentially raise rates in December, we think it will first want to assess the impact of furlough closure and will wait until February before triggering any ‘lift-off' in rates.
The MPC’s change of tone reflects the threat of rising inflation. Driven mainly by surging energy and fuel prices, inflation is set to be higher for longer than previously expected, with the CPI measure set to hit its highest in a decade. But structural factors and the likely resolution of supply problems mean we still believe the spike will be transitory.
Given that it’s 15 years since the UK last faced a sustained rise in borrowing costs, it’s unclear how the economy will respond. However, since the financial crisis, we’ve seen trends including a fall in the proportion of households with a mortgage and higher take-up of fixed-rate home loans. These shifts mean higher interest rates should have less of an effect on economic activity than in the past.
Watch on demand
Summary
With the UK economy continuing to rebound from the pandemic-related slowdown, GDP growth is powering ahead at rates not seen for several decades.
But with the jobs market booming and household finances in their strongest state ever, the rapid economic growth is bringing its own challenges – in the form of rising inflation and supply chains struggling to keep pace with resurgent demand. There’s also the prospect of a rise in interest rates, although probably not before February 2022.
However, while these factors may marginally constrain the UK’s post-pandemic recovery, they won’t derail it.