Key Takeaways
- The National Institute of Economic and Social Research (NIESR) cut its UK GDP growth forecast for 2024 to 0.7% from an earlier projection of 1.0%.
- The British Pound ($GBP/USD) declined by 0.35% to trade at $1.2585 immediately following the report's release.
- Persistent inflation is now expected to remain above the Bank of England's 2% target until late 2025, delaying potential rate cuts.
- The NIESR projects UK inflation will average 2.7% in 2024, significantly higher than previous estimates.
- Investors face a prolonged period of stagflationary pressures, increasing the appeal of defensive assets and international equity exposure.
NIESR Slashes UK Growth Projections Amid Geopolitical and Inflation Headwinds
The National Institute of Economic and Social Research (NIESR) today significantly lowered its UK GDP growth forecast for 2024 to 0.7% from an earlier projection of 1.0%, citing escalating geopolitical tensions and persistent inflationary pressures. The independent think tank also revised down its 2025 growth estimate to 0.9% from 1.3%, painting a bleaker outlook for the British economy.
This downward revision underscores a challenging economic landscape, with the ongoing Iran conflict identified as a primary driver of sustained energy price volatility. The NIESR report highlighted that inflation is now expected to remain above the Bank of England's 2% target until the final quarter of 2025, pushing back market expectations for interest rate reductions.
Market Impact
The NIESR's updated forecast immediately triggered a negative reaction in currency markets, with the British Pound ($GBP/USD) falling by 0.35% to $1.2585. This move saw the currency test its lowest level in two weeks, having traded above $1.2630 earlier in the session. The $GBP/EUR cross similarly retreated by 0.28% to €1.1680.
UK equity markets also felt the pressure, particularly domestically-focused stocks. The $FTSE 250 index, which largely comprises companies with significant UK revenue exposure, slipped by 0.8% in early trading, contrasting with a more modest 0.2% decline in the internationally diversified $FTSE 100. Gilts, the UK's sovereign bonds, saw a slight bid for safety, with the yield on the 10-year Gilt falling 3 basis points to 4.12%, reflecting a cautious flight to quality amidst growth concerns.
What Analysts Are Saying
"The NIESR's revised outlook confirms the growing stagflationary fears facing the UK economy," stated Jane Harrison, Chief UK Strategist at Barclays. "The combination of elevated energy prices from the Iran conflict and stubborn domestic inflation puts the Bank of England in an unenviable position, likely delaying any meaningful rate cuts until well into 2025, potentially even later than the NIESR suggests."
Analysts at UBS noted the specific impact on consumer spending. "Higher-for-longer inflation, particularly for essentials like energy and food, will continue to erode real household incomes," commented Michael Chen, Head of European Economics at UBS. "We anticipate a further softening in retail sales data through Q3 2024, placing pressure on discretionary consumer sectors within the $FTSE 250."
However, not all views were entirely pessimistic. "While the near-term outlook is undoubtedly challenging, the NIESR report perhaps understates the resilience of the UK labor market," suggested David Miller, Senior Economist at Investec. "Should global energy markets stabilize unexpectedly, or if wage growth moderates without a sharp rise in unemployment, the BoE could still find room for a limited rate cut in Q4 2024, offering a potential upside surprise for UK asset markets."
What to Watch
Investors should closely monitor the trajectory of global oil prices, particularly Brent crude futures, which have seen volatility around the $88 per barrel mark following recent developments in the Middle East. Any sustained breach above $90 per barrel could exacerbate UK inflationary pressures and lead to further growth downgrades.
Upcoming UK economic data releases will be crucial, including the May CPI inflation report on June 19 and the Q2 GDP preliminary estimate due in August. A higher-than-expected inflation print or a weaker GDP reading could reinforce the NIESR's cautious stance and prompt further market adjustments.
The Bank of England's monetary policy meetings, particularly the August decision, will be keenly watched for any shifts in forward guidance on interest rates. While the market currently prices in a first rate cut by November 2024, any hawkish rhetoric from Governor Andrew Bailey could push this expectation further into 2025, impacting $GBP/USD and Gilt yields.
Key technical levels for the British Pound include immediate support at $1.2550, a level that has held firm on several occasions in May. A decisive break below this could open the path towards $1.2480, while resistance remains at the $1.2650 mark. For the $FTSE 100, the 8,200 level represents critical support, with a sustained move below potentially signaling a deeper correction.