The British economy performed better than expected in the fourth quarter. Final GDP rose by 1.3% in Q4 of 2021, upwardly revised from the first quarterly estimate of a 1.0% gain. The final GDP beat the forecast of 1.0%. On an annualized basis, GDP in 2021 jumped 7.4%, a massive turnaround from -9.3% in 2020.
The economy has almost completely recovered from the pandemic, with GDP currently only 0.1% below the pre-COVID level in Q4 of 2019. The recovery is certainly good news, but there are dark clouds nearby, namely, soaring energy prices and the specter of stagflation. BoE Governor Bailey had a stark warning for consumers this week, saying that real incomes would suffer a “historic shock”.
The BoE has raised interest rates three consecutive times, but this hasn’t slowed down inflation, which accelerated to 6.2% in February, a 30-year high. The Bank says the Ukraine war could push inflation as high as 8% in Q2 and even higher in the third quarter. Double-digit inflation is a possibility later this year, which would be a nightmare scenario for Governor Bailey and Finance Minister Rishi Sunak.
The BoE doesn’t have a magic answer for surging inflation, which has also reached the US and other major economies. The BoE can, of course, hike interest rates in order to subdue inflation, but the danger is that high rates could choke off economic growth. Governor Bailey has a formidable challenge of charting out a rate-tightening cycle in which interest rates are high enough to lower inflation but don’t derail the recovery. Time will tell if Bailey will “get it right” with the pace and size of upcoming rate hikes.
GBP/USD Technical
- GBP/USD faces resistance at 1.3281 and 1.3380
- There is support at 1.3102 and 1.3022
