Investors’ focus is shifting from the poor growth/inflation mix to the extremely negative external balance picture in the UK. Last Friday (23/09), the government announced an additional 0.5% of GDP in unfunded tax cuts and the reaction of UK assets recalled actions we used to see only in emerging markets.
The market is giving a strong signal that it is no longer willing to provide capital to fund the UK’s external deficit position. The correlation between interest rates (selling off in response to the announcement) and the currency (that broke sharply) signals that the market is questioning the credibility of UK policymakers’ actions.
The UK economy is corrently being impacted by different forces that makes forecasting of the economic outlook increasingly difficult. The news on the budget side may help counterbalance some upside pressures on inflation already present in the system and made more persistent due to higher energy prices for a more prolonged period, as per our updated projections.
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