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UK GDP, Employment: Last Data Before BOE Hike?

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Next week, the BOE will meet and potentially raise rates for the last time this cycle. Whether or not that’s the case could depend on the data coming out over the next few days. On the one hand, economists believe there is still some way to go for the hiking to be over. On the other, the head of the BOE, Andrew Bailey, recently hinted in parliament that rates have gone almost as high as they will.

One of the chief concerns to be addressed is the impact of the labor market on inflation. The BOE was first to acknowledge that inflation had been high long enough that it was having ‘second round’ effects. That’s when workers demand – and get – higher wages due to rising cost of living. This raises the cost to produce goods and services and entrenches the inflationary pressure. That means the upcoming jobs data could be pivotal for how the BOE reacts.

The UK’s Jobs “Problem”

The jobs market in the UK has remained surprisingly resilient given the general economic situation. The unemployment rate has remained at or even below structural level, and average wages have been rising at a rate comparable to the lowering inflation rate. A prolonged series of strikes has hurt domestic economic production, but it has resulted in higher wages, which in turn has supported the UK consumer.

In order to get inflation back to target, the BOE would have to see a drastic reduction in inflationary pressures. That’s the strong labor market, and the also surprisingly resilient UK economy. Industrial production has managed to beat forecasts repeatedly these last months, despite strikes and labor shortages. Both of those indicators point to the BOE having room for more hikes, and potentially the need to tighten policy even more.

What to look for in the data

The UK unemployment rate is expected to remain unchanged at 4.2%. That is a problem, because it allows for the continued growth in wages, which are expected to see annual expansion of 8.0%, barely down from the 8.2% reported prior. That is now well above the annual inflation rate of 6.8%. While that’s great for the UK worker’s pocketbook, the continued high demand has kept core inflation up, which is a headache for the BOE.

The BOE has a limit of how much it can raise rates before seriously hurting the economy, particularly now that home prices are starting to trend lower because of the high rates. Additionally, the government’s ability to keep spending can be impacted as it has to borrow at increasingly higher costs. Outperformance in the labor data could signal higher rates, but raise more worries of a recession down the line – which means drastic rate cuts in the near future.

The economy won’t quit

Economists have been forecasting that the UK economy would slip into contraction for most of the year, but that hasn’t happened. Once again, the consensus is that UK GDP will be negative, at -0.3%, down from the 0.5% record in the prior month. Even considering that large downturn, the rolling three-month average is still seen at 0.2%.

It might be that economists are finally right, and the UK economy turned around in summer. That would imply that the pound could find some weakness as investors price in no more rate hikes after September. But if the data once again disappoints to the upside, then cable could continue higher as investors face the prospect of US and UK interest rates not only matching, but he BOE potentially going higher than the Fed before the cycle is over.

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