Cracks in UK economy 'beginning to show' as outlook for Q3 'not particularly encouraging'

As expected, this morning’s GDP print showed that Britain’s economy flatlined in July, posting no growth at all on a month-on-month basis. The cracks in the UK economy are beginning to show following a period of surprise resilience, and the outlook for the rest of the third quarter is not particularly encouraging either.

Rising inflation, easing wage growth and the recent increase in household bills should continue to squeeze the UK consumer. Businesses also remain under pressure from the April tax hike, and confidence is fragile ahead of November’s Autumn Budget, which is almost certain to deliver further pain as the Chancellor looks to plug the gaping hole in the public finances.

The Bank of England will be meeting next week, but there is almost no chance of another cut, despite the bleak economic outlook. UK inflation remains too high for comfort, and until officials have confidence that the 2% target is in sight, we think that they will be reluctant to lower rates any further.

Swap markets have not completely written off the possibility of additional easing this year, but it seems unlikely unless we see some big misses in upcoming inflation readings, starting with next Wednesday’s data for August.