Goldman Sachs: UK Weekly - FJElite
- Persistence in higher Energy prices: The war in the Middle East continues to curtail global energy supply and we have seen Oil prices spike above $100/bbl and Gas rise sharply to above EUR 60/Mwh. In addition, outages in Qatar will restrict gas production for several years, and our Oil team’s scenario analysis suggests that the risks to oil prices remain skewed to the upside both in the near-term and in 2027.
- Growth down: Our economists expect a hit of about 0.5pp to 2026 Q4/Q4 UK real GDP growth, with downside risks if the curtailment of energy supply lasts substantially beyond 21 days. While the relative resilience of growth in 2022 could point to a more moderate effect, they expect less fiscal support this time around. The growth impact of higher energy prices in 2022 was also likely cushioned by excess savings and a post-pandemic supply-side recovery, see: How Vulnerable is the inflation jir_QwiiL_and Monetary Policy Outlook to Higher Energy Prices?
- And inflation up: Since the start of the conflict our economists have raised their UK inflation forecast for 2026H2 by 0.5pp, a material upgrade but smaller than the increase in Euro area inflation estimates. While a high correlation between gas and electricity prices makes UK inflation more vulnerable to fossil fuel price fluctuations, the Ofgem price cap should moderate the impact of shocks that are expected to unwind. That said, the impact could be much larger if the market prices a larger and more persistent shock to gas prices, a scenario increasing in likelihood.
- But wage pressure not the same as in 2022: Labour market data out this week showed the unemployment rate unchanged at 5.2% in January, and the payrolls firmer than anticipated, with the January data revised up to show a modest expansion and the February flash pointing to a larger 20k increase. But the pay growth figures were weaker than anticipated, with private sector pay growth dropping to 3.3% yoy. On balance this is good news - better quantities but no troublesome rise in wage inflation, which of course would quickly feed through to services inflation.
- Bond pressure: While the inflationary concern may be less than 2022 it is growing, and the message from the Bank of England meeting this week was hawkish, and our economists now think that the MPC will remain on hold for longer and maintain Bank Rate at 3.75% throughout 2026 (versus quarterly cuts from July previously). They see the Committee gradually normalising policy next year to reach an unchanged 3% terminal rate. Gilts sold off further this week too and parts of the UK equity market remain very sensitive to rising yields, especially Home Builders, Real Estate and FTSE 250 more broadly (Exhibit 1 and Exhibit 2).
- Equity reaction: We show sector performance since end February (when the Iran war started) versus performance in 1H 2022 after Russia launched its full-scale invasion of Ukraine (Exhibit 3). Banks, Healthcare and Basic Resources all were outperformers in early 2022, but have not been so far in this recent crisis - we continue to see Banks as offering good longer-term value and healthcare should benefit in this environment from its lack of economic sensitivity and from its high USD-based earnings. FTSE 250, UK Domestic (GSSTUKDE) and Small Caps have underperformed in the last couple of weeks, but not more than we had expected based on the moves in early 2022. Consumer Discretionary sectors have underperformed (for example Travel & Leisure and Retailers) as they did in 2022. Their recent relative move suggests they are implying a fall in real wage growth to about -2% yoy; the low for real wage growth was -4% yoy in 2022 (driven by inflation eroding the real value of wages not nominal pay declines) (Exhibit 4).
