United Kingdom Economic Outlook
After flatlining in Q4, the economy is expected to shrink quarter-on-quarter in Q1 on rising interest rates, elevated inflation and the tough base effect created by December’s sharp GDP decline. However, recent data suggests there are upside risks to this projection; economic activity beat market expectations in January, and the private-sector PMI indicated improving operating conditions in February–March. Moreover, robust employment growth and improving consumer sentiment in January–February should be aiding private spending. The government presented the spring budget in mid-March, which contains fiscal loosening worth around GBP 16 billion annually in the next five years. Measures include investment incentives, a fuel duty freeze, higher defense spending, an extension of the energy price cap and steps to boost labor market participation. The budget should boost both near- and medium-term output.
United Kingdom Inflation
Inflation rose above market expectations to 10.4% in February (January: 10.1%). Price pressures will ease later this year on soft economic momentum, milder commodity price pressures a tougher base effect. Moreover, the extension of the energy price cap through June will tame energy prices. However, inflation will remain above the Bank of England’s (BoE) 2.0% target.