Stormy waters ahead for the UK, and we don’t mean Brexit

Today’s announcement that the Bank of England wouldn’t be raising rates was accompanied by a hawkish statement that they may well rise soon. The additional confirmation of hawkishness was a surprise, following the BoEs hawkish reaction to the higher than expected CPI numbers for July released earlier in the week.

This is bad news for the UK given that when the ONS finally got around to releasing the 2017Q2 NGDP data it showed another disappointing reading. The YoY growth fell below 4%, with the drop off in nominal growth inevitably accompanied by a drop off in real growth. In addition, due to the very rapid growth in the workforce, real growth per head (aka productivity) could not be anything other than disappointing.

Scared by the CPI, rather than celebrating some above target readings after a run of below target data points, the BoE and the markets will cause even slower nominal growth and thus no recovery in RGDP growth, or worse.  The implied deflator, the best measure of “inflation” was just under 2% in 2017Q2 … and falling!

The UK government had better figure out how to organize the desired soft Brexit pretty darn quick as they are going to get little help from the previously very helpful BoE. The rapid rise in GBP vs the USD is a warning signal even if the weakness vs the EUR is nicely comforting, although seems to be going into a rapid reverse.


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