Energy shock weighs on outlook – Societe Generale

Societe Generale economists describe a quiet week in the UK, with Gilt yields easing as markets trimmed Bank of England (BoE) hike expectations after Governor Bailey pushed back on tightening. Survey data show higher CPI expectations but stable wage expectations, suggesting limited second‑round effects. However, falling real household incomes and the energy shock are expected to worsen consumption trends into 2027.

Rates repricing and real income squeeze

“Last week in the UK, it was a fairly quiet period. Gilt yields eased from 5% to 4.8%, driven largely by a repricing of rate hike expectations this year. Most of this repricing occurred before Andrew Bailey forcefully pushed back against market expectations of a rate hike this year, echoing our view that slack in the economy should limit second‑round effects.”

“On the data front, the Decision Maker Panel, which ran from 6 to 20 March, recorded a 0.5pp rise in single‑month year‑ahead CPI expectations to 3.5% yoy, a 27‑month high. However, year‑ahead wage expectations eased slightly by 0.1pp to 3.5%. This may suggest firms believe second‑round effects from the current energy shock may be limited, although it more likely reflects laggy data.”

“Lastly, the final 4Q25 GDP release showed real household disposable incomes continued to decline, falling by 0.4% yoy vs 0.3% yoy in 3Q25. This trend is likely to worsen and weigh on consumption due to the energy shock, since around 40% of annual pay deals are set in April and were likely concluded prior to the Iran war, while energy‑related inflation will erode nominal wage growth until the 2027 settlements.”

“This week in the UK is another quiet one.The March construction PMI is likely to follow the composite lower, as orders soften on the back of a confidence slump triggered by the energy shock.”

“Similarly, the March RICS housing survey is likely to show a deterioration in sales expectations, as numerous mortgage deals have been withdrawn and two-and five-year interest rate swaps, which underpin mortgage pricing, have risen by roughly 50bp to their highest levels since December 2024.”

“Meanwhile, the BoE’s Credit Conditions Survey was likely conducted prior to the shock and is therefore likely to present a relatively positive picture of borrowing conditions.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)