China slowdown may have limited impact on U.K. economy

The slowdown in U.K employment growth will draw PMC's attention towards monetary conditions and external risks. Monetary conditions have substantially tightened over the past two years, driven by exchange rate appreciation and an increase in real interest rates. While a rebound in inflation would partially alleviate this passive tightening, further exchange rate appreciation would only make it more complicated for the BoE to engineer a rate hike anytime soon. 

In addition, fresh concerns relating to China raise the specter of a global slowdown in trade. That said, if the slowdown remains contained to China alone, the direct effect on the UK would likely be limited, as Barclays estimates the effect of a 200bp slowdown in China could lead to a 10-15bp effect on UK GDP. While that would not be significant, it would nonetheless be an additional reason for even more gradualism in rate hikes. This week, markets have been pushing out expectations of a rate hike and February 2016 is now priced at barely 50%, against 65% at the beginning of the week, says Barclays.