Stakes are high for UK economy ahead of crunch week of data
Investors will be paying close attention to the UK economy again this week ahead of a series of crunch data releases.
The latest inflation figures, covering December, will be published on Wednesday before GDP figures for November will be released on Thursday.
City economists expect inflation to remain unchanged at 2.6 per cent, while the economy is projected to return to growth having suffered two months of contraction.
But the data releases come at a time when the economy is facing particular scrutiny from international investors following last week’s sell-off in UK government debt.
Although bond yields rose all over the world, gilt yields increased faster than peers. The yield on the 30-year gilt hit its highest level since 1998 on Wednesday before the 10-year gilt hit a post-financial crisis high on Thursday.
Commentators suggested this reflected unease with the government’s economic agenda as well as lingering fears about the persistence of inflation.
While the turmoil in gilt markets had calmed by the end of the week, investors remain tetchy.
Economists at Goldman Sachs said: “The recent sell-off raises the stakes for the upcoming inflation data releases”.
If inflation comes in higher than expected, or if growth fails to materialise, then the sell-off could resume with renewed intensity.
Analysts at Investec said markets will be “especially sensitive” to any signs of stubborn price pressures in the inflation report.
Attention will likely centre on services inflation, which rate-setters have flagged as a good gauge of homegrown inflationary dynamics. Services inflation fell to 5.0 per cent in November, and most analysts expect to see it continue falling in the months ahead.
However, many economists are worried that the measures announced in the Budget – such as the minimum wage hike and the national insurance increase – could buttress inflationary pressures.
Multiple business surveys have suggested that firms are preparing to hike prices in response to the Chancellor’s tax hike while extra government spending could also contribute to higher prices.
“Budget policies are set to provide temporary upward pressure to inflation,” analysts at Barclays said.
These concerns over inflation come amid a sharp slowdown in economic activity since June, raising the prospect of stagflation – the combination of stubborn price pressures and weak growth.
The increase in borrowing costs has also all but wiped out the £9.9bn buffer Reeves left in October to meet her balanced budget rule, which requires day-to-day spending to be met by tax receipts.
If these movements persist, Reeves will likely have to make another round of tax hikes or spending cuts, potentially as soon as March when the Office for Budget Responsibility (OBR) releases its new set of forecasts.