Growing Fears. Falling Growth

UK Economy Contracts 0.3% over April
The UK economy contracted 0.3% in April, far below market expectations of +0.2%, signalling yet another concerning sign for the health of the UK economy. This morning’s data also suggests that the UK economy is just 0.9% higher than pre-pandemic levels, in comparison to 1.3% earlier in the year.With the Bank of England expecting Q2 GDP to come in at 0.1%, April’s print seemingly undermines these predictions with the prospects of an overall contraction during this year’s second quarter now appearing highly likely. This is significant given that the Bank of England had previously forecasted quarterly GDP to fall in Q4, however today’s data raises investor’s fears that a technical recession (two consecutive contractions in quarterly growth) will come sooner than previously anticipated.

Given that today’s print follows a contraction of 0.1% during March, prospects of a 50bpt hike at the next monetary policy meeting on Thursday have been slashed as the market weighs in on how the BoE will be concerned that too greater monetary tightening could derail the UK economy even further. As such, this morning’s data has reinforced the general market consensus of a 25bpt rise on Thursday, bringing the base rate to 1.25%.

The Guardian has more:

Growing Fears. Falling Growth
This morning’s release follows forecasts from the OECD which predicted that the UK economy would have the lowest level of growth amongst the G7 next year. The Parisian headquartered think-tank estimated that the UK will experience 0% growth over the course of 2023, while they slashed this year’s forecasts from 4.7% (made in January) to 3.6% citing issues over inflation, supply chains, loss of investment and trade. Such assessments come alongside low levels of consumer confidence, falling real wages and concerns over the UKs future post-Brexit trading relationships.

Similarly, just a few weeks ago the IMF forecasted that the UK will have the second lowest level of growth amongst the G20 during 2023 reducing the UK’s growth forecast from 4.7% to 3.7% over 2022 while the Bank of England’s Governor, Andrew Bailey stated that the economy would likely begin to contract in Q4 2022 while falling 0.25% over 2023.

As such, this morning’s alarmedly high print – and future expectations of rising inflation and stagnant growth – reconfirms how stagflation will continue to be a pressing issue for the BoE, No11 and the 28m households across the UK.

The BBC has more:

Market Reaction
Following this morning’s alarming data, the FTSE 100 fell some 0.9% while the FTSE 250 slumped close to 1.5%, putting UK shares at their lowest levels in over three weeks. BP and Shell were amongst the largest fallers on the blue-chip index as investors weighed on the slowdown of growth and oil consumption. Conversely, HSBC’s shares have risen over 1% as investors consider the implications of higher interest rates on mortgage holders and business loans.

US CPI Hits 8.6%
This morning’s low GDP print comes alongside US CPI figures coming well above market expectations last Friday, with headline inflation surging to 8.6% against predictions of 8.3%. This saw the Dow fall 2.7% while the S&P 500 and Nasdaq slumped 2.9% and 3.5%, respectively. Two-year Treasury yields (which are far more sensitive to rate hikes), also rose to 3.057%, representing the highest level since June 2008 to rate hikes as 10-year yields reached 3.178%.

The Michigan Consumer Sentiment Index also saw a major drop from 58.4pts in April to 50.2pts in May, well below market expectations of 58pts signalling consumer concerns over the rising cost of living and socio-economic conditions.

The Week Ahead
Tomorrow will see the release of UK employment data, where unemployment is expected to fall from 3.7% to 3.6% edging ever closer to full employment (despite a record level of job vacancies). Wednesday will see the Fed’s interest rate decision where the general market consensus is expecting to see a 50bpt rate hike, bringing the base rate to 1.5%. This comes ahead of the BoE rate decision on Thursday – where they are expected to hike 0.25 percentage points – and deliver further updates on the winding down of their balance sheet.

Have a great day.

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