Here are this week’s highlights in the UK economy.
UK suffers market rout. Sterling fell to a record low of $1.0350 against the greenback on Monday while the yield on the 10-year UK bond market soared 4.5% as an aftermath of Chancellor Kwarteng’s mini-Budget speech.
BOE launches buying spree. The Bank of England, in a bid to restore market stability, intervened in the gilt market by announcing it was prepared to purchase long-dated bonds. The central bank has earmarked £65 billion in its rescue program.
Kwarteng meets British bankers. The chancellor tried to reassure the financial community that the government was very much committed to fiscal discipline when he met officials from investment banks on Wednesday. This is the first in a series of roundtable discussions in the business.
Truss breaks her silence. After days of silence following Kwarteng’s mini-budget speech, the PM wrote in The Sun about her decisions that would involve “disruption in the short term”.
Energy price rise starts. The weekend marks the start of a household energy bill hike, which raises annual costs to £2,500 from £1,971. The energy bill cap, however, has cushioned the blow on the consumption cost per unit.
ONS corrects GDP report. The Office for National Statistics (ONS) revises its GDP growth estimate in Q2 2022 to 0.2%, up from its first estimate contraction of -0.1%. Earlier reports of UK recession were also revised following the new estimate.
GDP revisions are carried out to adjust projections based on the amount of new information that economic managers receive. Some values that make up the published estimates may not be available at the time of publication, or a reconciliation of figures is needed. As such, national statistical offices issue revisions.
UK GDP revisions are carried out based on the Blue Book 2022, or UK’s 2022 annual national accounts, which compiles information on the economic activities of the country. This version accommodates changes in the sources and methods used by the ONS to improve its previous edition releases. The ONS follows its revisions policy in line with the methodological changes indicated in the Blue Book. Thus, changes in the Q2 2022 GDP have been issued.
The recent revisions have serious implications in policymaking. The central bank uses the GDP along with other economic variables to decide on interest rates, which directly affect the mortgage market. (Remember, however, that GDP alone is a weak indicator of any country’s well-being as it falls short of capturing economic activities that contribute indirectly to total productivity.)
We believe that the Q2 GDP revision will not alter the earlier forecast of the BOE, which expects 15 months of contraction. The economy is still being battered by the cost-of-living crisis, the impact of the Ukraine-Russia conflict (especially now that Putin has announced his annexation of Ukraine) and the growing uncertainty over Kwarteng’s unfunded tax cuts.
More so, short-term market reactions over Kwarteng’s fiscal credibility are becoming more prominent. The pound recovered slightly on Friday morning against the dollar after the revised GDP announcement, but the gain was overshadowed by another slip as Kwarteng insisted that the Office for Budget Responsibility (OBR) would have to wait until November 23rd to release new economic forecasts.
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