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Pound Sterling: UK Economy Back to Growth with an Impressive Rebound in GDP

May 12, 2024 - Written by John Cameron


The UK economy grew by 0.6% in Q1.

This follows on from two quarters of contraction.

Real wage growth is a positive for the economy.

The FTSE is rallying strongly while the pound remains stable.

Friday caps a busy week for UK markets with the release of GDP data. This showed Britain has convincingly shifted away from the weakness shown at the end of last year into growth. A first quarter preliminary reading of 0.6% is impressive given the technical recession preceding it. The Q4 print was a concerning –0.3%.

“Rising real wages, an easing of the recent mortgage squeeze and high economic migration have helped lift the UK economy back into growth,” noted ING.

The 0.6% figure was better than the 0.4% expected and puts the UK on solid footing for 2024 when rate cuts are almost certain to happen given the BoE’s rhetoric on Thursday. The FTSE is once more making new all-time highs while the pound has remained stable despite the prospect of cuts. EURGBP remains at 0.86.

The impressive GDP figure is backed up by leading indicators such as PMIs which already suggested the UK would return to growth this year. Strength should continue in Q2 as there are several positive drivers. Firstly, real wage growth should boost the economy. This is created when wages are rising faster than inflation, which should be the case in Q2 and beyond as inflation is expected to drop near 2% while nominal wage growth is up around 6%. The only downside to this is the high wage growth may limit the dovishness of the BoE, especially if inflation bounces back again as warned by Governor Bailey on Thursday. The second positive tailwind for the UK economy comes from the fading mortgage squeeze. Disposable income should rise as a result.

With the situation looking much better for 2024, it does introduce questions as to why the BoE would be in a rush to cut rates. In Thursday’s meeting Bailey said, “a June bank rate cut is not ruled out or planned” which certainly leaves the door open either way. However, the general message was that they will be responsive to data and Bailey added “there are two more inflation prints before the June decision.” We can therefore assume that if the CPI data is cool enough, and shows services inflation moderating, then a June cut will happen. This prospect could weigh on the pound in May.

US Data Rolling Over

Data in the US and UK seems to always be going in opposite directions. When the UK was in a technical recession at the end of last year, the US was strong, and now when the UK is returning to growth, the US data has rolled over. Granted, it is far from recessionary levels, but the signs of softness are piling up. Thursday’s Employment Claims came in at 231K, the highest weekly reading since August last year. This adds to the negative trend with a weaker Jobs Report, lower PMIs and GDP missing estimates.

The reaction in the USD and stock markets was telling. The S&P500 rallied to new May highs, while the dollar broke a three-day winning streak with a sharp drop. Markets see this as more reason for the Fed to cut rates sooner than later. CPI data is due next week and could make or break the perception of Fed dovishness and dollar weakness. A September cut is still the most likely, but if inflation were to cool sufficiently, July could be the focus. As ING note,

“...the key to taking the dollar materially lower remains inflation. Consensus is looking at 0.3% month-on-month core CPI print on Wednesday, which is still too high for the Fed to start cutting rates this summer.”
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