The second quarter of the year has been a tricky three months for the Bank of England (BoE) as inflation continued to soar - and is expected to rise further - while growth slowed to a crawl, sparking fears that the UK may enter a recession (two consecutive quarters of negative growth). While the BoE may argue that it has been dealt a bad hand of cards, their reaction to runaway inflation now looks like it is has been too little, too late. UK headline inflation is now over 9% and, if the BoE’s forecasts are correct, it is set to hit double-digits in the coming months, with the soaring price of fuel and food continuing to hit the UK consumer hard. The inflation genie is well and truly out of the bottle and the UK central bank may need to double down on rate hikes to try and get price pressures under control.
Bank of England Growth Chart
Source: TradingEconomic.com
In the Q2 forecast we looked at the inflation/growth puzzle that the BoE needs to solve and recent data show this situation worsening. Inflation continues to soar while the latest, monthly, UK GDP data shows the economy not just slowing down but going into reverse. While April’s figure was hit by a slowdown in the coronavirus test and trace program to the tune of 0.4% GDP, data showed contraction across all sectors in the UK economy. With UK Q2 and Q3 growth expected to be flat, there is a real chance that a further economic downturn will send the UK into a recession. This in turn leaves the UK central bank facing the tricky problem of quelling inflation while leaving the UK economy with enough room to grow.
UK Economy Chart
Source: TradingEconomic.com
The UK labor market remains in
