UK economy increasingly likely to suffer ‘bumpy landing’, says Bank of England’s Taylor – business live | Business

Bank of England policymaker Alan Taylor has warned that the UK economy is at a growing risk of “a bumpy landing”.

Speaking at King’s College, Cambridge (Taylor’s alma mater) today, he sticks to his reputation as a dovish member of the Bank’s monetary policy committee. He predicts that wage settlements will be pushed down in “an economy with rising unemployment and weak demand”, meaning little risk of an upward spiral in wage-led domestic inflation.

Taylor argues that there are now three plausible scenarios in 2026, of varying pain for consumers and businesses:

The first scenario is the “soft landing”, which Taylor fears is receding in terms of probability.

He says:

By maintaining what I think is a too restrictive path of interest rates, we may have braked too hard, such that inflation cannot smoothly return to target with the economy close to potential, as my votes have indicated.

The second scenario is the “bumpy landing”, which Taylor thinks is increasingly likely.

This, he says, is:

… a downside scenario, where inflation undershoots, and goes below target in late 2026, and the economy moves into a weakened state for a sustained period, with output and employment below potential, leading to undue damage to economic activity.

The third scenario is the “hard landing”, which Taylor calls “a deeper worry”. He says:

This was a remote and low probability event a year ago, but the risk is rising. In this scenario, weak demand at home can lead to a more forceful downturn, where recession dynamics start to kick in that can be very difficult to contain or even reverse. The economy has been flirting with zero growth, and the realisation of negative readings could easily change the future path for the worse. The probability of this outcome is now not trivial. This would be the ‘downside to the downside’ scenario and it would lead to an even more dramatic inflation undershoot than the second scenario. To end up here would be a mistake.

Taylor also outlines in his speech how the UK could find itself on the end of a “double diversion phenomenon” as Donald Trump’s tariff war diverts trade flows

He explains how this could lead to more goods from China arriving in the UK, unless London takes protectionist trade measures, making the “bumpy landing” more likely, saying:

First, the US raises barriers on imports from low-cost producers, who then redirect their goods to third countries, like the EU, who in turn respond with further barriers to those low-cost producers, who then move on again to direct their large flows of exports to an ever-smaller target group of open export markets. Naturally, the UK comes to mind as one of those potential targets.