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A circulate of key knowledge over the previous 10 days suggests the UK economy is much less of an outlier amongst its peer nations than beforehand thought, as figures confirmed sudden financial resilience and a sharp decline in inflation.
Just a few weeks in the past, Britain was the solely giant superior economy not displaying a regular downward development in worth progress, regardless of having the highest inflation rate in the G7. Many analysts anticipated UK output to contract in the second quarter regardless of not having but regained its quarterly pre-pandemic ranges.
Meanwhile, markets had priced in a Bank of England rate of interest rise from the present 5 per cent to six.5 per cent by the finish of the yr, in flip driving up mortgage charges and sending the property market into turmoil.
However, in June, UK inflation dropped unexpectedly to 7.9 per cent — the lowest fee since March 2022 — and down from 8.7 per cent the earlier month.
Surprisingly, sturdy retail sales in June and a better-than-anticipated economic efficiency in the three months to May led many analysts to forecast a marginal output growth in the second quarter.
“The UK still looks like the international outlier when it comes to inflation and still deserves its label as the ‘stagflation nation’ [but] the economic news of the past month has suggested that the gap is narrowing,” mentioned Paul Dales, economist at Capital Economics.
On Monday, the consultancy EY upgraded its UK financial progress forecast for this yr to 0.4 per cent from the 0.2 per cent beforehand estimated, on the again of indicators of higher resilience.
“The UK economy is in a frankly terrible place, but economic data over the past 10 days has offered some welcome encouragement,” mentioned Torsten Bell, chief government of the Resolution Foundation, a think-tank.
UK core inflation, which strips out meals and vitality costs, fell in June, lastly beginning to converge with charges in the US and the eurozone, after rising in the other way in the months earlier than.
At the identical time, the sharp fall in inflation indicated stress is easing on customers in addition to mortgage holders, with markets now anticipating the central financial institution to boost rates of interest — which drive up the price of borrowing — much less quickly.
This, mentioned Kallum Pickering, economist at the Investment Bank Berenberg, “reduces the risk that the BoE will have to force a hard landing to bring inflation under control”.
Economists have warned that file excessive wage growth registered in the three months to May is still a concern with reference to inflation.
“The big question is how a fast-cooling labour market brings to an end historically strong wage growth, as it already has in the US and eurozone,” mentioned Bell.
However, many analysts count on that can occur quickly, partly attributable to a decline in job inactivity that has stored the UK labour market tighter than in different nations. The newest knowledge confirmed that job inactivity fell to its lowest fee since the spring of 2020, at the starting of the Covid pandemic.
Official knowledge confirmed that the resilience of the UK’s progress and labour market helped public sector borrowing to fall in June in contrast with the identical month final yr. The hotter climate additionally spurred the third consecutive growth in retail gross sales volumes recorded in June.
Simon Harvey, head of research at international trade firm Monex, mentioned over the previous two weeks, issues about sticky inflation, wage spirals, rising borrowing prices and falling home costs “have receded considerably”.
But regardless of the encouraging knowledge, the UK continues to carry out poorly in worldwide comparisons. In the three months to March, the economy was still 0.5 per cent smaller than in the fourth quarter of 2019, earlier than the pandemic.
In distinction, the US economy grew 5.6 per cent and the eurozone 2.2 per cent over the identical interval.
Meanwhile, UK headline inflation is still greater than twice the 3 per cent of the US and the highest amongst the G7. While falling, food inflation is still increased than in most richer nations. And markets are still pricing that rates of interest will rise extra in the UK than in different massive economies over the coming months.
“Overall, the UK has made some progress in narrowing the gap on inflation,” mentioned Dales. “But the bigger picture is that it still has more of an inflation problem and has had more languid gross domestic product growth in recent years than the US and the eurozone,” he added.
