The UK has been one of the best performer among the advanced economies in 2015. The economy has grown by about 2.5%, in line with analysts’ estimation for the year. On the edge of 2016, market participants have two major sources of concern for the next year.
The first one is whether the Bank of England will follow the Fed path and raise interest rates for the first time since 2007. The timing of the move will mainly depend on the data on growth, inflation and labour market in the first half of 2016. However, given the current economic environment, the first rise is not expected until the autumn of 2016.
The second interesting issue is the referendum to decide whether the UK is to continue to be member of the European Union. The referendum has to take place by the end of 2017 but it is expected around the half of 2016, possibly June. This event is likely to rise the level of political uncertainty around the country, after the recent warning that half of the Conservative Party of the incumbent Prime Minister David Cameron backs the ‘leave’.
However, political uncertainty will not be the only hurdle for a stronger recovery. After the recent increase of interest rates by the Fed, a period of divergence between the Fed and the European Central Bank seems likely. This will highlight the weakness of the UK’s trading partners in the Eurozone. This must be added to the fear for the Chinese slowdown, still concerning, and to the internal problems of low productivity growth. A year ago average inflation, measured using CPI, was forecasted to be around 1.5% but the forecast has been missed and inflation should average around 0.1% this year. Market participants will also have to monitor the government’s fiscal plans, which aim to eliminate the deficit by 2020. In the short-term, if the 2015-2016 target of £73.5bn has to be met, higher tax receipts will be needed as soon as January 2016.
Chiara Cauli
The first one is whether the Bank of England will follow the Fed path and raise interest rates for the first time since 2007. The timing of the move will mainly depend on the data on growth, inflation and labour market in the first half of 2016. However, given the current economic environment, the first rise is not expected until the autumn of 2016.
The second interesting issue is the referendum to decide whether the UK is to continue to be member of the European Union. The referendum has to take place by the end of 2017 but it is expected around the half of 2016, possibly June. This event is likely to rise the level of political uncertainty around the country, after the recent warning that half of the Conservative Party of the incumbent Prime Minister David Cameron backs the ‘leave’.
However, political uncertainty will not be the only hurdle for a stronger recovery. After the recent increase of interest rates by the Fed, a period of divergence between the Fed and the European Central Bank seems likely. This will highlight the weakness of the UK’s trading partners in the Eurozone. This must be added to the fear for the Chinese slowdown, still concerning, and to the internal problems of low productivity growth. A year ago average inflation, measured using CPI, was forecasted to be around 1.5% but the forecast has been missed and inflation should average around 0.1% this year. Market participants will also have to monitor the government’s fiscal plans, which aim to eliminate the deficit by 2020. In the short-term, if the 2015-2016 target of £73.5bn has to be met, higher tax receipts will be needed as soon as January 2016.
Chiara Cauli