UK economy to sustain weak growth pace – Forex News Preview
August 10, 2023 12:28 pm
The UK economy has probably narrowly escaped a recession in the first half of the year flash Q2 GDP data are expected to show on Friday at 06:00 GMT. On the other hand, inflation is still the elephant in the room and another poor GDP report could do little to scale down expectations for a rate hike next month. With public finances following an unstable path and chances for a decent recovery moving further into the horizon, the pound may not like the data.
UK economy stays in slow lane
The British economy has been stagnant since the start of the year, growing by a negligible annual rate of 0.2% in the first quarter. The second quarter was not different according to forecasts. Analysts estimate a steady marginal expansion, while foreseeing zero growth compared to the previous quarter.
The good news is that a recession has been avoided so far, but it’s not a foregone conclusion. In July, the manufacturing sector remained in contraction, while the services sector, which contributes to two-thirds of national growth, lost back its recovery for the year, sending the composite business PMI index lower.
In other important details, new export business kept falling for the eighth consecutive month, marking it the fastest decline in three years on the back of weakening global market conditions. Service providers mentioned high costs due to increased wages and input prices. They also said that fragile consumer demand was caused by rising interest rates.
Businesses are hopeful about increased output next year but are still worried about lower disposable income and the effects of higher interest rates on spending.
Consumers could suffer more
The central bank acknowledged that inflation is past its peak, but it expects it to stay at an uncomfortable level before it potentially returns to its 2.0% target in 2025. Hence, although easing inflation could provide some relief to consumers, living expenses may remain relatively high if wage growth lags inflation. Discouragingly, the savings ratio has dropped significantly from the pandemic peak, being only two percentage points higher than the 2019 levels, while a gauge of permanent hiring declined at the fastest pace in three years in July.
Whether the government could provide a firm safety net to a sluggish economy remains to be seen. If inflation stays the major priority, Sunak may have limited options to boost growth through stimulative fiscal measures since such actions would conflict with the central bank’s price stability efforts. Moreover, the Treasury’s fiscal watchdog told journalists last month that fiscal finances are rapidly deteriorating, highlighting multi-billion pound demand for defense spending, healthcare, and climate. He also foresees tax rises and spending cuts to keep fiscal debt to GDP below 100% in the years ahead.
GBP/USD
Turning to FX markets, the British pound has been trending lower since mid-July, probably because of the huge repricing in BoE rate hike expectations. Investors are currently awaiting a lower terminal rate within the 5.5-5.75% zone from above 6.0% before. That leaves a final rate increase in September and a poor GDP report could do little to postpone it, as inflation may not slow down significantly by then.
The central bank’s outlook for the economy is even gloomier at the end of 2023. Hence, policymakers might prefer to act sooner rather than later. Nonetheless, if the data arrives worse than expected, signaling that the economy might be in a worse situation than initially believed, pound/dollar could correct down to 1.2600. A more aggressive decline could touch the lower boundary of the short-term bearish channel seen at 1.2535.
Alternatively, a positive surprise in the figures could equip the BoE’s comfort for another rate hike next month. In this case, pound/dollar may reach the upper band of the short-term bearish channel at 1.2810. The 20-day simple moving average (SMA) could challenge any further improvement at 1.2840 ahead of the 1.2940 barrier.
The UK economy has probably narrowly escaped a recession in the first half of the year flash Q2 GDP data are expected to show on Friday at 06:00 GMT. On the other hand, inflation is still the elephant in the room and another poor GDP report could do little to scale down expectations for a rate hike next month. With public finances following an unstable path and chances for a decent recovery moving further into the horizon, the pound may not like the data.
UK economy stays in slow lane
The British economy has been stagnant since the start of the year, growing by a negligible annual rate of 0.2% in the first quarter. The second quarter was not different according to forecasts. Analysts estimate a steady marginal expansion, while foreseeing zero growth compared to the previous quarter.
The good news is that a recession has been avoided so far, but it’s not a foregone conclusion. In July, the manufacturing sector remained in contraction, while the services sector, which contributes to two-thirds of national growth, lost back its recovery for the year, sending the composite business PMI index lower.
In other important details, new export business kept falling for the eighth consecutive month, marking it the fastest decline in three years on the back of weakening global market conditions. Service providers mentioned high costs due to increased wages and input prices. They also said that fragile consumer demand was caused by rising interest rates.
Businesses are hopeful about increased output next year but are still worried about lower disposable income and the effects of higher interest rates on spending.
Consumers could suffer more
The central bank acknowledged that inflation is past its peak, but it expects it to stay at an uncomfortable level before it potentially returns to its 2.0% target in 2025. Hence, although easing inflation could provide some relief to consumers, living expenses may remain relatively high if wage growth lags inflation. Discouragingly, the savings ratio has dropped significantly from the pandemic peak, being only two percentage points higher than the 2019 levels, while a gauge of permanent hiring declined at the fastest pace in three years in July.
Whether the government could provide a firm safety net to a sluggish economy remains to be seen. If inflation stays the major priority, Sunak may have limited options to boost growth through stimulative fiscal measures since such actions would conflict with the central bank’s price stability efforts. Moreover, the Treasury’s fiscal watchdog told journalists last month that fiscal finances are rapidly deteriorating, highlighting multi-billion pound demand for defense spending, healthcare, and climate. He also foresees tax rises and spending cuts to keep fiscal debt to GDP below 100% in the years ahead.
GBP/USD
Turning to FX markets, the British pound has been trending lower since mid-July, probably because of the huge repricing in BoE rate hike expectations. Investors are currently awaiting a lower terminal rate within the 5.5-5.75% zone from above 6.0% before. That leaves a final rate increase in September and a poor GDP report could do little to postpone it, as inflation may not slow down significantly by then.
The central bank’s outlook for the economy is even gloomier at the end of 2023. Hence, policymakers might prefer to act sooner rather than later. Nonetheless, if the data arrives worse than expected, signaling that the economy might be in a worse situation than initially believed, pound/dollar could correct down to 1.2600. A more aggressive decline could touch the lower boundary of the short-term bearish channel seen at 1.2535.
Alternatively, a positive surprise in the figures could equip the BoE’s comfort for another rate hike next month. In this case, pound/dollar may reach the upper band of the short-term bearish channel at 1.2810. The 20-day simple moving average (SMA) could challenge any further improvement at 1.2840 ahead of the 1.2940 barrier.
Related Posts: