Britain’s current account deficit fell to to £33.8bn in the second quarter, but economists are still concerned.
Samuel Tombs at Pantheon Macroeconomics says:
The current account deficit remained extremely large in the second quarter, mainly due to the surge in the cost of energy imports. Natural gas futures prices suggest that the overall trade deficit likely will increase to about £40bn in Q4 and £45bn in Q1 2023, from £26.2bn in Q2.
This will counter the impact of sterling’s recent deprecation.
Accordingly, the current account deficit likely will increase to about 8% of GDP in Q4 and 9% in Q1, further increasing the sensitivity of sterling to changes in overseas investors’ willingness to provide finance.
It would be foolish to rule out sterling falling to parity against the US dollar, especially given that the pound’s current value relies on expectations of an implausibly sharp increase in Bank Rate. But we expect the government to announce spending cuts when it publishes its medium-term fiscal plan in November, providing some reassurance to overseas investors that have fled UK markets in the last week.
Accordingly, we see sterling at around the $1.05 mark at year end, with the further drop being driven by the monetary policy committee raising Bank Rate to 4%, rather than the 6% currently priced-in by investors.
Revisions by the Office for National Statistics to the last couple of years also paint a worse picture during the pandemic. GDP is estimated to have fallen by 11% in 2020, rather than 9.3%, and to have recovered by 7.5% in 2021, rather than 7.4%.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, says:
Accordingly, GDP in Q2 2022 was 0.2% below its Q4 2019 peak, rather than 0.6% above it, implying that the damage inflicted to the economy’s supply side by Covid and Brexit is even larger than previously thought.
These revisions will compel the OBR to revise down further its estimates for future potential GDP, though as they also imply that the tax-to-GDP ratio is higher than previously estimated, the impact on the public finances should be modest.
Let’s return to the GDP figures, which showed the UK economy grew by 0.2% between April and June, rather than shrinking by 0.1% as previously estimated.
Paul Dales, chief UK economist, says:
The good news is that the economy is not already in recession. The bad news is that contrary to previous thinking, it still hasn’t returned to pre-pandemic levels. It’s the only G7 economy in that situation and it makes the chancellor’s fiscal plans look even more untenable.
So despite the better news on the performance of the economy in Q2, the overall picture is that the economy is in worse shape than we previously thought. And that’s before the full drag from the surge in inflation and leap in borrowing costs have been felt.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, tweeted:
We’ve spoken to people about how they are being affected by the chaos in the mortgage market, sparked by last Friday’s mini-budget.
“We will likely lose our dream house,” says one couple, writes Jedidajah Otte.
UK house price growth flatlined in September with a stronger slowdown expected as a combination of soaring inflation and mortgage rates stretches housing affordability.
A typical UK home cost £272,259 in September, zero increase on the previous month and the first time flat growth has been recorded month-on-month since July last year, Nationwide Building Society said this morning.
Mel Stride, the Conservative MP who chairs the Treasury select committee which wants the OBR’s independent forecast scheduled for 23 November to be pulled forward, has been on BBC radio 4’s Today program to talk about Truss’s and Kwarteng’s meeting with the fiscal watchdog. he said:
The good news is clearly this is being very taken seriously because confidence in the markets needs to be regained and critical to doing that will be to go to the markets and say the OBR has carried out an independent forecast of the proposals put forward by the government and measured against reasonable and credible fiscal rules. The OBR’s view is that those rules can be met.
That will be a very difficult conversation because of course the judgment so far of the markets and indeed myself and many others is that what was announced last Friday unfortunately doesn’t stack up fiscally and some changes are almost certainly going to need to be made…We can possibly have a major reset moment in which confidence can be regained.
It begs the big question to what the OBR will be saying to the prime minister and the chancellor in this meeting today. I suspect strongly that it will be that the circle cannot be squared. You can’t come forward with multiple billions of unfunded tax cuts in a high inflationary environment with a very tight labor market and expect that along with various supply side changes, to develop the growth that’s going to pay for those tax cuts. That’s just not feasible and isn’t going to work, so there needs to be a rethink, and that will be a very difficult conversation.
The Bank of England’s monetary policy committee meets on 3 November to decide on interest rates, and needs to have the OBR’s estimates, and so the publication of the OBR forecast should be brought forward from 23 November – and to “give the markets greater confidence, Stride argued.
Good morning, and welcome to our rolling coverage of business, the world economy and the financial markets.
The pound has edged higher, ahead of a meeting between Liz Truss and the chancellor, Kwasi Kwarteng, with the head of the Britain’s independent fiscal watchdog on Friday, after days of financial market turmoil triggered by the government’s package of unfunded tax cuts.
Last night the Office for Budget Responsibility confirmed that it had done a draft forecast to be produced alongside last week’s mini-budget and had given it to the chancellor. However, Kwarteng chose not to publish it, which is one of the reasons why the market reacted so badly to his mini-budget.
The pound has recovered from its losses and hit a one-week high of $1,222 early in Asian trading. Following the GDP figures, sterling was trading at $1,1134, up 0.18%.
This means sterling could be on track for its biggest weekly gain since 2020, despite plummet to a record low of $1.0327 on Monday.
The euro has also bounced back versus the dollar, and is trading slightly higher at $0.9821.
Sean Callow a strategist at Westpac in Sydney, has warned that the pound’s recovery may not last. He told Reuters:
The recovery in cable is very eye catching… But with the UK already running very large current account deficits, we doubt there is much more upside in sterling.
Britain’s economic picture was better than previously thought in the April to June quarter, but the economy continues to slow, warned the statistics office.
The UK economy grew by 0.2% in the second quarter, rather than shrinking by 0.1% as previously thought, according to final figures from the Office for National Statistics. But it added that the economy’s overall size is smaller than previously estimated, 0.2% below its pre-pandemic level.
“I’d never seen anything like it”: how market turmoil sparked a pension fund selloff. The Guardian’s banking correspondent Kalyeena Makortoff and Sarah Butler have looked into the chaos that prompted the Bank of England’s emergency intervention in the government bond market on Wednesday.
Asian stocks fell again, and are heading for their worst month since the onset of the Covid pandemic, amid worries about a global recession and other risks. MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.3%, taking its monthly loss to 13%. Japan’s Nikkei has lost 2.1% while the Australian market has shed 1.2%.
7.45am BST: France inflation for September (forecast: 5.9%)
8.55am BST: Germany unemployment rate for September (forecast: 5.5%)
9.30am BST: Bank of England mortgage approvals and consumer credit for August
10am BST: Eurozone inflation for September, flash estimate (forecast: 9.7%)
10am BST: Italy Inflation for September (forecast: 8.7%)
1.30pm BST: US PCE price index for August
3pm BST: US Michigan Consumer sentiment final for September (forecast 59.5)