Newsroom

Wednesday 27th September 2023

According to a report from a prominent US thinktank, the UK's economy is expected to contract in both the current year and 2024. The report suggests that stubborn inflation and a shortage of workers will have a more detrimental impact on growth prospects than what most analysts anticipate. The Peterson Institute for International Economics (PIIE), based in Washington, forecasts a 0.3% GDP decrease this year, followed by a 0.2% decline next year. In contrast, the eurozone and the US are expected to experience growth during these periods. The PIIE president, Adam Posen, expressed pessimism about the UK's economic outlook, preceding the International Monetary Fund's forthcoming revised forecasts, which are anticipated to show growth in the UK this year and a modest recovery in 2024. The Bank of England recently provided some relief to struggling mortgage borrowers by maintaining interest rates at 5.25 percent. However, it may take a considerable amount of time before rates begin to decrease. While interest rates may have reached their peak, analysts warn that they could remain at current levels for a year or longer. This situation presents a challenge for homeowners with fixed-rate mortgages that are maturing in the near future, as they still face substantial repayment increases. The rate-setting monetary policy committee (MPC) of the Bank of England narrowly voted 5/4 in favour of the interest rate freeze, and there is even speculation that MPC members could push for another rate increase at their next meeting on November 2, despite signs of a slowing economy. The British pound recently hit a six-month low against the US dollar, raising concerns that the UK may enter a recession due to high interest rates. The pound has depreciated by 3.4 percent against the dollar so far this month and by 7.2 percent since mid-July. These declines are driven by worries that the current 15-year high in interest rates, implemented to combat inflation, will stifle economic growth. A recession would reduce the likelihood of further interest rate hikes, as the economy would already be contracting. A majority of businesses in the eurozone have reported ongoing declines in activity and new orders this month, signalling a potential economic contraction. The headline figure for the eurozone purchasing managers' index, at 47.1, was slightly better than August's reading of 46.7 but still well below the critical 50 mark. The HCOB flash composite PMI, which measures business activity across the 20-country eurozone, also indicated the fourth consecutive monthly decrease in new orders, described as the most significant decline since November 2020. The confidence of American consumers has declined this month, particularly concerning the future, as expectations persist that interest rates will remain high for an extended period. The Conference Board, a business research group, reported that its consumer confidence index dropped from 108.7 in August to 103 in September. Analysts had expected a smaller decrease, with a reading of 105. The index assesses both Americans' current economic perceptions and their outlook for the next six months. Currently, the EURUSD exchange rate has slipped over the past few weeks and stands at 1.0565, while the GBPEUR exchange rate is at 1.15.