The UK economy could be headed for a particularly turbulent period ahead, according to a report published this week by NIESR (National Institute for Economic and Social Research), which has forecast long periods of stagnation in the years ahead. The NIESR also downgraded its predictions for next year, forecasting that inflation could go above 5% and could stay higher for longer than expected, whilst accusing the UK government and the Bank of England of mismanaging the economy since the financial crash in 2008.
The NIESR expects the economy to grow in 2021 by 6.9%, and by 4.7% in 2022, before falling sharply to 1.7% in 2023 and 1.3% in 2024, with its Director Jagjit Chadha stating that ‘we’re getting the economic management of the UK economy wrong’.
The Bank of England voted to keep interest rates on hold at 0.1% last week, which was widely unexpected by the markets, as the expectation was for a rise in rates. This prompted a fall in the value of the Pound, which has since struggled to make any significant gains since. NIESR Deputy Director Paul Mortimer-Lee said ‘the pressure from rising inflation would become impossible to ignore next Spring, forcing the MPC to increase rates to 0.5%’. There is currently a 52.3% chance of a rate hike at the Bank of England’s next interest rate decision in December, of 25 basis points.
There has been a flurry of economic data releases this morning which are likely to impact the value of the Pound as we begin the day’s trading. Gross Domestic Product (GDP), showed that the economy grew by 0.6% in September, however estimates were revised lower for previous months. This meant GDP was lower that it was in February 2020, before the UK went into its first lockdown. Manufacturing and Industrial production figures were both lower than in September than the month prior, along with services which was significantly lower at 1.6% compared to 3.7% previously. The Pound has weakened this morning against its major pairings, as a result of the negative economic outlook.
There are increasing concerns that Germany, the economic powerhouse of Europe, is now at risk of becoming its economic laggard following a recent surge in Covid-19 cases. 40,000 new daily cases were reported on Wednesday, pushing the 7 day infection rate to 232 per 100,000 people – a record high. Economists are concerned that restrictions to contain the rise in infections would likely hit consumer activity, and add to the already challenging supply chain issues, further halting industrial output.
The German Council of Economic Experts has become the most recent group to downgrade its growth forecasts for Germany from 3.1% to 2.7% this year, warning that supply issues are putting greater strain on manufacturers than had been expected. However, the council raised its forecasts for next year from 4% to 4.6%. If these forecasts are to be proven, this would mean that Germany would have one of the slowest growth rates in the eurozone, compared to the current expectation of 4% this year.
The next key data release of note for the Euro will be released at 10am tomorrow. Industrial Production figures for September. Expectation is for an improvement from -1.6% in August to -0.5% in September, however any deviation from these numbers could cause EUR movement.
The US Dollar made gains against its major currency counterparts yesterday following the release of US Consumer Price Index data, also known as Inflation, which surprised the market by soaring from 5.4% to 6.2% in October. This was the largest jump year on year since November 1990, and has provided an excellent opportunity for those clients holding US Dollars.
Fed Chair Jerome Powell warned last week that inflation had been ‘longer lasting than anticipated’. He went on to say that the Fed still expect the recent increase in prices to be ‘transitory’ but that it was ‘very difficult to predict the persistence of supply constraints of their effects on inflation’. The latest report shows that prices rose across the board including clothes, car parts, food, energy and shelter. The energy index rose by over 30% over the last 12 months. US President Joe Biden has since said that reversing the current levels of inflation is a top priority for him, and has asked the White House National Economic Council to look into reducing energy costs to combat inflation.
Tomorrow sees the release of the Michigan Consumer Sentiment Index for November at 3pm. The previous reading for October was 71.7, however expectation is for a slight fall to 71.4. Consumer sentiment fell to its lowest level in almost a decade in August, as inflation levels rose, so we could see this figure released lower than expectation which could cause volatility for the US Dollar.
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