GBP

The British industrial sector remains mired in contraction, house prices are falling, labour markets are softening, and a broad array of underlying growth indicators are pointing to slowing momentum. With the full impact of higher policy rates yet to hit home, most forecasters currently expect the economy to exhibit stagflation-esque characteristics in 2024 – consensus estimates show inflation topping 3.1 percent while a mild, front-loaded recession leaves growth below 0.4 percent by year end. 2024 consensus forecasts, averaged across data providers

It is increasingly obvious that price pressures in the UK have simply lagged their international counterparts in this cycle, and are likely to fade at a relatively comparable pace in the early new year. All-items inflation rose just 3.9 percent in the year to November, the slowest pace since September 2021, and core – which has trailed headline inflation in all major developed economies, fell to 5.1 percent from 5.7 in the prior month – led by a slowdown in services growth. Consumer Price Indices, annual % change

Speaking in Capetown this August, Bank of England Chief Economist Huw Pill suggested that the central bank’s policy path could resemble the broad and flat “Table Mountain” which looms over the southern tip of Africa. Under this scenario, he argued, rates wouldn’t need to climb a lot higher, but might have to remain at elevated levels for a prolonged period to bring inflation risks down. Thus far, his colleagues have signalled agreement. In contrast with their counterparts at the Federal Reserve – who have acknowledged they could begin cutting in the early new year – British officials have maintained a...

A broad-based stabilization in fiscal governance and cross-Channel relations has lowered economic policy uncertainty levels in the UK over the last year, with both the “moron risk premium” and its Brexit-related equivalent beginning to evaporate in financial markets. In an effort to bolster popular support, Prime Minister Rishi Sunak’s government has pivoted toward cutting taxes and increasing spending – steps that are unlikely to alleviate price pressures, but might help put the economy on a better footing in the long term. And with a general election due to land before January 2025, opinion polls are pointing to a landslide victory...

Our outlook for the pound is bifurcated. As it becomes clear that post-pandemic price dynamics are not reflective of a post-Brexit structural break, and are instead simply lagging those seen on the Continent, we expect the exchange rate to fall in line with relative rate differentials. A pullback to sub-1.25 levels is not beyond the realm of possibility in the first quarter. But in the longer term, we think underlying economic resilience could keep yield differentials surprisingly well supported. According to recent data revisions, the British economy managed to outperform both France and Germany through much of the post-pandemic period,...