Despite the fact that real GDP in the third quarter United Kingdom remained 0.4% below pre-pandemic levels, nominal GDP was almost 10% higher. The large discrepancy is also indicative of obstacles that Bank of England (TTA) faces. Even if her serious problems Britannia are based on the supply side, the bank must mobilize anyway to reduce the risk of high inflation perpetuating. In conditions of an inelastic labor market, the risk of a second round of inflation loomed all summer. By raising interest rates and tightening financing conditions, the Bank of England is de facto dampening demand to offset bottlenecks in the supply chain. And while the point that will break the bull cycle is likely approaching, perhaps also in December, the current economic situation is likely to drag on over the winter. This is because the delayed impact of the interest rate hike, which began in December last year, is gradually being reflected in the economy.

In the third quarter, capital investment by UK non-listed firms also fell 0.5%. This weakening follows a trend that has continued and has been noticeable since the UK voted to leave the EU in June 2016. Compared to the pre-referendum trend, corporate investment fell 36%. And while overall real GDP has largely recovered from the pandemic, corporate investment remains 8% below the level of the last quarter of 2019. The main factor of concern remains uncertainty as a result of the country’s exit from the EU. The UK and the EU are reportedly close to a mutually acceptable solution to resolve the former’s objections to the Irish Border Protocol, giving hope for an improvement in the situation. We are not overly concerned, as some commentators are, that further tightening of borrowing costs will further hurt business investment. The collapse of Lehman Brothers was followed by years of austerity from 2010 to 2016, yet corporate investment rose nearly 40%. Because fiscal discipline can help bring down interest rates and inflation, it can encourage firms to take investment risk.

* Messrs. Holger Schmieding, Callum Pickering and Salomon Fiedler are economists at Berenberg Bank.