UK GDP Surpasses Expectations But Fears Remain

UK GDP Surpasses Expectations But Fears Remain

GDP for May surpassed expectations by 0.5 percentage points this morning as it indicated that the UK economy grew half a percent. This represented a sharp contrast to last month’s print which showed that the economy contracted 0.2% and thus this morning’s figure has somewhat eased concerns over the prospect of a looming recession. Nevertheless, there are concerns that much of the growth was confined to holiday, travel and leisure spending following a bounce in spending aided by the Early May Bank Holiday and what the ONS described as “increased confidence in holiday booking following the end of Covid restrictions”. In contrast, last month saw a decline in retail trade which fell 0.5% while?consumer-facing services fell by 0.1% in May, indicative perhaps of the wider drop in consumer confidence manifesting itself in growth. Indeed, growth from the ‘sports activities and amusement and recreation activities’ category dropped over 0.2 percentage points, demonstrating how consumers are reducing spending on non-essentials given the rising cost of living and fall in real disposable incomes.

Hence, despite this morning’s print coming well above the general market consensus, the FTSE 100 slid almost 1% during early morning trading, while the FTSE 250 fell 0.2%.

Concerning the prospect of a recession, the Bank of England previous forecasts predicted that quarterly growth in the UK would begin to contract in Q4 ahead of a 0.5% contraction for 2023. Similarly, Goldman Sachs have forecast that the chances of a recession in the UK next year is 45%, in comparison to the US at 30% and the Eurozone at 50%. Recently, the IMF forecasted that the UK would have the second lowest level of growth amongst the G20 during 2023 and the lowest amongst the G7 while Andrew Bailey stated that the economy would likely begin to contract in Q4 2022 while falling 0.25% over 2023.

Sri Lanka

Prime Minister Ranil Wickremesinghe has been appointed as the Acting President of Sri Lanka as he declared a national state of emergency and imposed regional curfews.

This follows the Sri Lankan President, Gotabaya Rajapaksa vowing to resign following months of civil unrest and social hardship which culminated in thousands of protestors storming his residence on Saturday. The President has been heavily criticised over his mismanagement of the country’s finances with inflation standing at 54.6%, foreign exchange reserves being fully utilised?and pharmaceutical, food and petrol products running dry. Sir Lanka has been particularly hard hit by the exponential rise in wheat and other food products, which was not helped by the President banning fertiliser which subsequently damaged crop yields. Neighbouring countries have also been struggling to donate food to the country, though China and India have provided some credit lines and other financial assistance.?

Scottish INDEREF 2?

The UK government has submitted a request to the Supreme Court to dismiss the case for the second Scottish independence referendum, which follows the Scottish government asking the Court to review whether they could hold a referendum without the consent of Westminster. The UK government maintains that Holyrood could not lawfully hold a referendum without consent of the Westminster.

US CPI

This afternoon will see the release of US CPI data where the general market consensus suggests that headline inflation will rise 0.1 percentage points to 8.7% as energy prices and the cost of food continue to rise. Expectations of a further rise in inflation – and a subsequent tightening of monetary policy conditions at the FOMC’s meeting on 27th?July – has fed into further support for the USD. This has helped the DXY rise to 108.25 this morning (despite falling from a peak of over 108.50 yesterday) means that the DXY is hovering around its highest level in 20 years.

At the back end of last month, Powell asserted that restoring price stability was the Fed’s most pressing issue and stated that “we can’t fail on that task. We have to get back to 2% inflation” and as such projections of another 75bpt rate hike have been growing.

RBNZ Hike Rates by 50bpts.

This morning saw the RBNZ meet market expectations of conducing a 50bpt hike, the third consecutive hike of this kind which brings the base interest rare to 2.5%. This comes as CPI recently surged to 6.9% and Q1 saw a Q-o-Q contraction of -0.2%.