News & Views

Economy outlook update February 2023

21st February 2023

Jeff Lewis. director at RobMac, summarises the most recent economic outlook.

Jeff Lewis, director at RobMac

The outlook for growth and inflation has improved markedly in the UK and Europe in recent weeks, largely as a result of tumbling natural gas prices. Lower inflation will boost confidence and should mean that Europe’s consumers begin to draw down their Covid savings  – all that money that governments threw at us during Covid that we were unable or unwilling to spend. Consumers here have been so frightened by the prospect of soaring energy costs  that they have actually been saving more not less. By contrast, in the US they  have had the confidence to spend more, using their savings earlier .

It’s likely that  inflation could   fall towards 3% by year end in the UK and Europe. Perhaps all the strikes may be over by then too.

The impact should be particularly strong in the UK.  We expect the Chancellor, Jeremy Hunt, to cancel the increase in the energy price cap, to £3,000, previously planned to take effect from April. Indeed, the chances are that the current £2,500 price cap won’t be binding from July onwards. Actual prices could be closer to £2,000. These prices are all much higher than they were before Russia invaded Ukraine but the outlook has improved so much in recent weeks and months. Favourable weather is partly responsible but projected  European and UK gas prices have also fallen for next winter already . They have halved since early December with the powerful forces of supply and demand are working well in this regard.

So, will lower inflation mean lower interest rates? Sadly, no. As the impact of soaring energy prices fades, stronger wage inflation means that the Bank of England (BoE) and European Central Bank have to keep monetary policy tight. It is possible that the housing recession in the UK leads to higher unemployment and does the BoE’s work for them but it’s likely  the easing of the cost-of-living crisis will offset this. Wage inflation was relatively low in Europe but recently it has accelerated markedly. Mortgage rates have  also risen in the euro area but the impact is nothing like as strong as in the UK.

Europe will also benefit from an improved outlook for global growth. It was predicted that  the US would be in recession by now but the recent data on consumer spending and employment there has been remarkably strong. China is also enjoying its lockdown easing bounce so on global scale it would appear we are moving into much more positive territory .



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