In a research note published today (14 July), the bank argued that while there were signs European economic activity may be slowing, it was better placed than the UK to grow.
OBR warns of ‘significant’ risks to public finances
The Eurozone Composite Purchasing Managers’ index (PMI) revealed last week (5 July) that business activity had slumped to 49.9 in June from May’s 52.8.
While BofA analysts said the data had “triggered some recession fears”, it argued that a risk of further contractions across the continent were “relatively low”.
This was due to other sentiment trackers, such as strong services activity and an expected “decent tourism season”, leading the bank to maintain its prediction of weak but positive GDP growth, estimated to be about 0.1% quarter-on-quarter.
The bank also argued that PMI’s “mapping to actual activity levels has always been shaky, and since Covid, that seems to have worsened”.
Meanwhile, while European wage growth remained a worry for the bank, it argued that it was still “a world away” from the UK, with a tighter labour market and wage growth currently sitting at 8.6%.
“If you want to worry about wages, worry about the UK,” the bank added. “There is a non-negligible probability in our view the [Bank of England] may have to deliver a hard landing to force down wage growth and inflation.”
The bank wrote that its predictions for wage growth were “much more persistent” than the BoE, arguing it will likely have to raise its wage growth forecasts “markedly” in its next set of forecasts, leading to higher inflation forecasts over the next one or two years.
It added that it predicted June’s UK inflation numbers, which will be revealed next week (19 July), to come in at 8.1%, with core inflation at 7.1%.
“The various shocks hitting the UK economy may also multiply up,” the bank concluded. “High inflation at a time of an extremely tight labour market might mean a different wage response than high inflation at a time of a loose labour market as after the financial crisis.”
