Last week, Sterling went from bad to worse. Meanwhile, as the UK finds itself battered by some of the worst economic indicators amongst its major counterparts. Underwhelming data has raised alarms about the state of the economy, prompting speculation regarding fiscal policy and potential tax increases. Britain borrowed far more than expected in June, the government said Wednesday. This further raises the stakes for new Chancellor Rachel Reeves, who might have to raise taxes in the fall to address growing fiscal uncertainties.
Recent economic data doesn’t bode well for a Brexit Britain. June’s retail sales figures were a big disappointment, coming in well below expectations. At the same time, July’s national business activity composite PMI stunned forecasters with equally grim data. Business misery index The signs do not look good for the UK economy stuck in stagnation’s death grip. That begs the question about the overall economic health and long term growth prospects.
Chancellor Reeves feels the increased pressure as the UK government steers this stormy fiscal seas. June’s borrowing figures were well above expectations, a sign of growing financial pressure. This has fueled deficit alarmist predictions that tax increases will be required to get the fiscal ship back on a steady course. In response, criticism of the state’s economic strategy has taken on a new form of urgency.
Amidst these challenges, the Bank of England (BoE) is preparing to respond with probably significant shifts in monetary policy. As a result, a 25 basis points rate cut in August is now seen as almost certain. Don’t get too excited just yet, say analysts who warn that future cuts after this one out the door could come at a slow clip. That more cautious approach is a definite signal to markets that they are increasingly concerned with inflation and the overall state of the economy.
The persistent weakness of sterling, combined with concerns about Britain’s economic flexibility, has put off investors. The currency’s recent fortunes have been hurt by the most recent batch of economic data plus the continued cloud of uncertainty around fiscal policy. So far the market seems to be digesting these news. Stakeholders are looking out for the first signs of a government or Bank of England response, and what these might entail.