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UK Growth Higher-than-Expected, Though Forecasted Path Remains Sluggish

UK growth exceeds expectations, farmers urge for British food growth, US inflation softer than expected, and US PPI released today.

The UK economy grew greater than expected over the second quarter of 2023, expanding 0.2% and beating forecasts of 0% growth. The stronger-than-expected print raises convictions that the UK economy may avoid a technical recession and is more resilient to the Bank of England’s monetary tightening cycle than expected. While Q2’s marginal growth is a bullish indicator vis-à-vis the UK’s post-pandemic recovery, quarterly GDP remains 0.2% below its pre-Covid peak.

Behind the print, this morning’s data indicates that the services sector grew 10bps, with the UK’s film and TV industry driving some of this increase. Live events also helped fed into the expansion of the services sector, especially given the strong weather seen over June. Meanwhile, the country’s production sector rose by 0.7%, while manufacturing expanded 1.6%. Household consumption similarly expanded 0.7% as families continued to spend on recreation and culture, dining and hotels.

The ONS also indicated that government investment sunk 6.7% as the Treasury looks to slow down spending. Earlier this year, we saw how public sector debt has surpassed more than

100% of GDP, marking the first time this has happened since 1961. Business investment also failed to match forecasts, coming in at 6.7% against expectations of 8.1% as the cost of borrowing reaches fresh 2008 highs after 14th consecutive rate hikes.

As well as beating market forecasts, today’s print also exceeds Threadneedle Street’s projections of 0.1% growth. Q2’s growth follows quarter-on-quarter growth of 0.1% seen during the first three months of the year. Last week, the Bank of England’s monetary policy report noted that while they are no longer forecasting a recession, output will continue to remain sluggish over the next two years. Such projections views are of course a considerable improvements from their assessments last year which pointed to eight consecutive quarters of economic contraction (starting in Q4 2022). As such, the UK economy – like many of its European and North American counterparts – is expected to see a ‘softer-than-expected’ landing. In light of the print, expectations for the Bank of England’s next rate decision remained more or less unchanged, with money markets pricing in around a 85% chance of a 25bps hike on 21 September.

Dig For Britain

The National Farmers Union has renewed calls to the government to urge the UK to grow more of its own food. With the pandemic and supply side implications of the Russian invasion of Ukraine continuing to bring the topic of food security into focus, the Union is calling for the UK to rely less on imports and more on domestically grown produce. The NFU Union’s leader maintains that “Our supply chains are too vulnerable. So, the government needs to take an active interest in the UK food chain resilience”. They continued by stating that “climate change is wreaking havoc on food production across the world, with farmers in Southern Europe literally fighting fires while farmers here are despairing as they now must spend thousands of pounds to dry sodden grain”. According to the Union, the UK’s overall food self-sufficiency was reached a post-war peak in 1984 hitting 78%. Since then, it has steadily declined to 60% by 2021.

US Inflation Comes in Softer-than-Expected

Following last month’s Fed rate hike, which brought the central bank’s benchmark target rate to 5.25%-5.5%, yesterday’s headline CPI print came in softer-than-expected hitting 3.2% on an annualised basis. As projected however, this yesterday’s headline inflation halted the trend of decelerating inflation which was seen over the last 12 months. Going into the print, money markets are were pricing in around a 12% chance of a 25bps hike in September, however the softer print saw this downwardly revised to around 10%.

Markets Turn to US PPI

At 13:30, markets will turn their focus to the release of the US’ producer price index which is forecasted to come in at 2.3%. If realised, this would mark a further slowdown, decelerating from last month’s print of 2.4%. Following last month’s print, Bloomberg stated that “Normalizing global supply chains, stabilizing commodity prices, and a broader shift in consumer demand toward services and away from goods have generally helped alleviate inflationary pressures at the producer level.” As such, following yesterday’s softer-than-expected US CPI print, all eyes now turn to PPI.