This morning, UK GDP figures showed that the economy shrunk 0.1% in May on a month-on-month basis. While the data showed a contraction, it was nonetheless a softer-than-expected contraction given that markets had been forecasting the economy to shrink 0.3%. UK production continued to fall, with the industry slipping 0.6% as the supply of electricity, gas and air conditioning fell 2%. The UK construction sector also contracted 0.2% as tighter monetary conditions weigh on investor sentiment to expand. This came as wholesale and retail trade also saw shrunk by ½ a percentage point between April and May, while the service sector stagnated at 0% growth.
UK economic activity over May was also impacted by the additional bank holiday for the King’s coronation, though it seemingly affected business differently. For example, here the ONS noted that “A range of manufacturing industries and businesses within construction cited the additional bank holiday for the Coronation of King Charles III on Monday 8 May as a reason for reduced output. On the positive side, we had comments suggesting industries in the arts, entertainment and recreation sector benefitted from the extra bank holiday. There were also comments on both increased and reduced output received in the accommodation and food services sector.”
The ONS also cited anecdotal evidence that industrial action had impacted different industries across the country, albeit to varying degrees.
May’s contraction indicates that UK GDP is now estimated to be around 0.2% greater than its pre- levels seen in February 2020. All eyes are now on UK growth over June, and whether the economy will show signs of growth over Q2. Given that May’s print will act as a drag on second quarter growth, some – including Deutsche Bank – are suggesting that the economy will shrink over the quarter as a whole. Attention also turns to how Threadneedle Street will interpret the data, with some economists maintain that it will not deter the BoE’s tightening course given that the contraction was less -than-expected.
Yesterday afternoon, data from the US indicated that inflation continued to slow amongst the world’s largest economy. For example, US Consumer Price Index (Annualised) Slowed to 3% against Expectations of 3.1%. This showed the index falling 100bps From May’s print and marked the lowest headline inflation since March 2021. Meanwhile the Core Consumer Price Index slowed to 0.2% on a month-on-month basis, thus coming in softer than the expected 0.3% projection. This similarly marked a fall of 20bps from May’s print. This came as consumer energy costs fell 16.7% on an annualised basis, though electricity prices appreciated 5.4%. The print did little to impact market expectations for the Fed’s rate decision on 26 July (where markets are projecting a 25bps hike), though the further fall in inflation gave markets greater confidence to the notion that the Fed may be approaching the end of their tightening cycle after July.
The UK’s trade balance fell considerably more-than-expected last month, sliding to a £6.58bn deficit in May from a £2.46bn deficit in April. This marks the largest trade gap since December 2022 as exports shrunk to their lowest level in just under a year, while imports rose 3.1%. Here the ONS stated that “the value of goods exports decreased by £1.4 billion (4.4%) in May 2023 with a fall in exports to both EU and non-EU countries; after removing the effect of inflation, exports of goods fell by 3.2%.” When looking at exports, goods sales to the EU fell by 6.8%, as demand for crude oil slipped.
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