Downturn fears hit sentiment

Bank of England

UK interest rates continue their climb

As inflationary pressures continued to bite, the Bank of England (BoE)  announced its fifth consecutive increase to interest rates during June, following rises in December, February, March and May.  The UK’s key base rate was raised by 25 basis points to 1.25%, reaching its highest level since early 2009. The FTSE 100 Index  fell by 5.8% during June, and the FTSE 250 Index  declined by 8.6%. Meanwhile, the yield on the benchmark UK gilt  climbed as high as 2.65% during the month, reaching its highest level since 2014.

A clouded outlook for the UK economy

The Organisation for Economic Co-operation & Development (OECD)  delivered a gloomy prognosis for the UK economy during June. Economic growth is expected to reach 3.6% this year, but is then set to stagnate in 2023. Inflation is predicted to reach double digits, easing to 4.7% by the end of next year, and higher prices are expected to continue to undermine public consumption. Having shrunk by 0.1% in March, the UK economy  contracted by 0.3% in April, dragged down partly by a decline in activity in the services sector.

Inflation tipped to rise above 11%

Higher costs for food and energy drove up the UK’s annualised rate of consumer price inflation  from 9% in April to 9.1% in May, achieving its most rapid growth rate since 1982. BoE policymakers expect inflation  to breach 11% in October, exacerbated by further increases in energy costs, but said it would “act forcefully” to control inflationary pressures. Nevertheless, wages are failing to keep pace with ongoing increases in the cost of living: average UK earnings (excluding bonuses)  fell by 2.2% year on year in real terms between February and April.

The consumer mood darkens

Consumer confidence continued to plumb new depths, according to market research firm GfK’s Consumer Confidence Index , which reached a fresh record low in June. According to GfK, the mood amongst UK consumers is “currently darker than in the initial stages of the Covid pandemic, the result of the 2016 Brexit referendum, and even the shock of the 2008 global financial crisis”. UK retail sales fell for a second consecutive month during May, according to the British Retail Consortium (BRC) , which commented: “It is clear the post-pandemic spending bubble has burst”.