‘Lingering’ inflation warning as UK secures major economic upgrade
The UK remains at risk from “lingering” inflation but its economy is among nations showing “robust” growth, according to a biannual report which upgrades its expectations for output both this year and next.
The Organisation for Economic Co-operation and Development (OECD) saw UK gross domestic product (GDP) rising by 1.1% this year – faster than the euro area combined.
That compared to a figure of just 0.4% it had forecast for 2024 back in May.
It marked one of the biggest upgrades to forecasts among the Paris-based club’s 38 member states.
Its predictions, the OECD cautioned, continued to be at the mercy of world events following a succession of shocks in recent years from COVID, Russia’s invasion of Ukraine and the conflict in the Middle East.
The UK upgrade largely reflected the better-than-expected performance seen during the first six months of the year when the country exited the recession of the second half of 2023.
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The downturn was widely blamed by economists on the impact of Bank of England interest rate hikes to bring down inflation.
In its update, the OECD said a high pace of wage growth, while moderating, remained a threat to the UK inflation outlook.
It also pointed to continued pressure from services price inflation.
The findings chimed with recent commentary from the Bank of England that it would take a cautious approach to further interest rate cuts, following the shift to 5% from 5.25% seen in August.
The OECD suggested UK growth would accelerate mildly to 1.2% during 2025 – a timeframe ahead that is currently shrouded in mystery as the new Labour government is yet to outline its first budget, due on 30 October.
Chancellor Rachel Reeves has promised a focus on bolstering growth.
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She said of the report’s findings: “Faster economic growth figures are welcomed, but I know there is more to do and that is why economic growth is the number one mission of this government.
“Next month’s budget will be about fixing the foundations, so we can deliver on the promise of change and rebuild Britain.”
The OECD forecasts showed a further downgrade for Europe’s largest economy, Germany, which was seen as growing by only 0.1% this year.
Its anticipated performance, largely a consequence of an uncompetitive manufacturing base during a time of slowdown in China, has proved a drag on the wider euro area’s GDP forecast.
That stood at an unrevised 0.7%.
The European Central Bank is expected to act twice more this year to cut borrowing costs in a bid to bolster flagging activity.
Its US counterpart cut its target range for the first time since 2020 last week amid worries over a hiring downturn.
The OECD said it still expected US GDP growth to slow to a rate of 2.6% this year – cushioned by further monetary policy easing as inflation came under control.
The report predicts: “Significant risks remain. Persisting geopolitical and trade tensions could increasingly damage investment and raise import prices.
“Growth could slow more sharply than expected as labour markets cool, and deviations from the expected smooth disinflation path could trigger disruptions in financial markets.
“On the upside, the recovery in real incomes could provide a stronger boost to consumer confidence and spending, and further oil price declines would hasten disinflation.”
It added: “Decisive fiscal actions are needed to ensure debt sustainability, preserve room for governments to react to future shocks and generate resources to help meet future spending pressures. Stronger efforts to contain spending and enhance revenues, set within credible medium-term adjustment paths, are key to ensuring that debt burdens stabilise.”
The UK’s benchmark stock index has reached another record high.
The FTSE 100 index of most valuable companies on the London Stock Exchange closed at 8,505.69, breaking the record set last May.
It had already broken its intraday high at 8532.58 on Friday afternoon, meaning it reached a high not seen before during trading hours.
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The weakened pound has boosted many of the 100 companies forming the top-flight index.
Why is this happening?
Most are not based in the UK, so a less valuable pound means their sterling-priced shares are cheaper to buy for people using other currencies, typically US dollars.
This makes the shares better value, prompting more to be bought. This greater demand has brought up the prices and the FTSE 100.
The pound has been hovering below $1.22 for much of Friday. It’s steadily fallen from being worth $1.34 in late September.
Also spurring the new record are market expectations for more interest rate cuts in 2025, something which would make borrowing cheaper and likely kickstart spending.
What is the FTSE 100?
The index is made up of many mining and international oil and gas companies, as well as household name UK banks and supermarkets.
Familiar to a UK audience are lenders such as Barclays, Natwest, HSBC and Lloyds and supermarket chains Tesco, Marks & Spencer and Sainsbury’s.
Other well-known names include Rolls-Royce, Unilever, easyJet, BT Group and Next.
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FTSE stands for Financial Times Stock Exchange.
If a company’s share price drops significantly it can slip outside of the FTSE 100 and into the larger and more UK-based FTSE 250 index.
The inverse works for the FTSE 250 companies, the 101st to 250th most valuable firms on the London Stock Exchange. If their share price rises significantly they could move into the FTSE 100.
A good close for markets
It’s a good end of the week for markets, entirely reversing the rise in borrowing costs that plagued Chancellor Rachel Reeves for the past ten days.
Fears of long-lasting high borrowing costs drove speculation she would have to cut spending to meet self-imposed fiscal rules to balance the budget and bring down debt by 2030.
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They Treasury tries to calm market nerves late last week
Long-term government borrowing had reached a high not seen since 1998 while the benchmark 10-year cost of government borrowing, as measured by 10-year gilt yields, was at levels last seen around the 2008 financial crisis.
The gilt yield is effectively the interest rate investors demand to lend money to the UK government.
Only the pound has yet to recover the losses incurred during the market turbulence. Without that dropped price, however, the FTSE 100 record may not have happened.
Also acting to reduce sterling value is the chance of more interest rates. Currencies tend to weaken when interest rates are cut.
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