Pound Sterling's Uncertain Future: Analysing the UK's Economic Trajectory
UK's economic outlook uncertain: BoE rate cut may boost inflation, October Budget critical for fiscal policy impact.
Sunday, August 11, Week 32
UK Macroeconomic Update: Steering Through Choppy Waters
This report provides a comprehensive analysis of the current macroeconomic landscape in the United Kingdom, offering valuable insights for forex traders. It delves into the country's fiscal and monetary policies, economic performance, and key economic indicators, highlighting potential opportunities and risks for currency traders.
Over the past five months, the UK economy has shown signs of resilience despite facing a challenging global environment. The pound initially received a boost following the Labour Party's election victory in June, but this momentum has since waned due to concerns about potential tax hikes and the impact of ongoing anti-immigration protests. The Bank of England (BoE) surprised markets in August by cutting its Bank Rate to 5% from a 16-year high of 5.25%, citing progress in moderating inflation risks. This decision, however, was met with a mixed response, with some analysts expressing concerns about the potential for a resurgence in inflation. The UK's trade deficit narrowed in Q1 2024, driven by a fall in imports, while the primary income account gap widened due to a decline in UK earnings.
Looking ahead, the UK's macroeconomic outlook remains uncertain. The upcoming Budget on October 30th will be closely watched for any changes in fiscal policy that could impact growth and inflation. The BoE's September meeting will also be crucial, as markets will be looking for further guidance on the future path of interest rates. The outcome of the Arcane Thunder 24 military exercise, concluding on August 16th, could also influence market sentiment, particularly if it leads to heightened geopolitical tensions.
Balancing the Books: Fiscal Policy Under the New Labour Government
The UK government's current fiscal policy is focused on balancing the need to support economic growth with the imperative of reducing the budget deficit. The Office for Budget Responsibility (OBR) estimates that public sector net borrowing in the 2023-24 financial year was 4.4% of GDP, down 0.6 percentage points from the previous year.
In the past five months, the new Labour government has not announced any significant changes to fiscal policy. The upcoming Budget in October will be crucial for understanding the government's fiscal policy plans for the next year. Any significant changes in spending or taxation could impact growth and inflation, potentially influencing the BoE's monetary policy decisions.
A Mixed Bag: UK Economic Performance Shows Signs of Both Strength and Weakness
The UK economy is currently in a state of flux, with recent data releases painting a mixed picture of its performance. While GDP growth has been stronger than expected in the first half of 2024, underlying momentum appears weaker, and some analysts are concerned about the potential for a slowdown in the second half of the year.
Key economic indicators have shown mixed performance in recent months. GDP growth surprised to the upside in Q1 2024, driven by strong growth in services and production, but the construction sector contracted. The unemployment rate has risen to 4.5% in June, its highest level since September 2021, while average weekly earnings growth has eased to 5.7%. Retail sales have been broadly flat in recent months, suggesting that consumer spending remains subdued.
Looking ahead, the key economic events to watch in the next five months include the release of the Q2 GDP data on August 15th, the September BoE meeting, and the October Budget.
Charting a New Course: Monetary Policy in a Post-Pandemic World
The Bank of England's current monetary policy stance is focused on returning inflation sustainably to the 2% target while supporting economic growth and employment. The BoE's mandate is to maintain monetary and financial stability, with price stability being the primary objective.
In the past five months, the BoE has made two significant monetary policy decisions. In June, the MPC voted to maintain the Bank Rate at 5.25%, but two members dissented, preferring a cut. In August, the MPC voted by a majority of 5-4 to reduce the Bank Rate to 5%, citing progress in moderating inflation risks. This decision was influenced by a number of factors, including the fall in CPI inflation to the 2% target, the easing of short-term inflation expectations, and the continued loosening of the labour market.
Market expectations regarding future monetary policy actions are currently mixed. Some analysts expect the BoE to cut rates further in the coming months, while others believe that the Bank will hold rates steady for the time being. The September BoE meeting will be crucial for understanding the MPC's thinking on the future path of interest rates. The release of the July CPI inflation data on August 14th could also influence the BoE's decision-making process, particularly if it shows a significant deviation from the 2% target.
Navigating the Headwinds: UK Macroeconomic Outlook Faces Multiple Challenges
The UK's macroeconomic outlook is clouded by uncertainty, with a number of factors potentially impacting growth and inflation in the coming months. The BoE's recent rate cut, while intended to support the economy, could also lead to a resurgence in inflation if demand proves to be stronger than expected. The upcoming Budget in October could also have a significant impact on the outlook, depending on the government's fiscal policy decisions.
Top Three Risks:
Inflationary Resurgence: Synopsis: Despite recent moderation, there is a risk that inflationary pressures from second-round effects will prove more enduring in the medium term. A stronger-than-expected path for demand, and structural factors such as a higher equilibrium rate of unemployment, could affect domestic wage and price-setting more persistently. Upcoming Events:
August 14th: July CPI inflation data release
September 19th: BoE meeting
October 30th: UK Budget
Geopolitical Uncertainty: Synopsis: The ongoing conflict in the Middle East and other geopolitical tensions could lead to higher energy prices and disrupt global trade, potentially impacting the UK economy. Upcoming Events:
August 15th: Q2 UK GDP data release
September 19th: BoE meeting
October: Russia to host a BRICS summit (potential for impact on global economic outlook)
Global Economic Slowdown: Synopsis: The global economy is facing a number of headwinds, including the war in Ukraine, rising inflation, and tighter monetary policy in many countries. A slowdown in global growth could have a negative impact on the UK economy, particularly through its effects on exports. Upcoming Events:
August 15th: Q2 UK GDP data release
September 19th: BoE meeting
October: Russia to host a BRICS summit (potential for impact on global economic outlook)
Action Points for Forex Traders:
Monitor the September BoE meeting (September 19th) for further guidance on the future path of interest rates.
Pay close attention to the October Budget (October 30th) for any changes in fiscal policy that could impact growth and inflation.
Track developments in the global economy, particularly in the US and China, as a slowdown in global growth could have a negative impact on the UK economy and the pound.
Economic Indicators
Economic Growth:
Monthly GDP MoM (May): 0.4% (Actual), 0% (Previous), 0.2% (Consensus)
The monthly GDP data for June will be released on August 15th and is expected to show continued growth, albeit at a slower pace than in May. The impact of the BoE's recent rate cut will be closely watched for any signs of a boost to economic activity.
GDP Growth Rate (Q1): 0.7% (Actual), 0.6% (Previous)
The preliminary Q2 GDP data will be released on August 15th and is expected to show a further expansion, driven by continued growth in consumer spending and business investment.
GDP Annual Growth Rate (Q1): 0.3% (Actual), 0.2% (Previous)
The annual GDP growth rate is expected to remain modest in the coming months, reflecting the ongoing impact of high inflation and tighter monetary policy.
Price Changes (Inflation):
Inflation Rate YoY (June): 2% (Actual), 2% (Previous), 1.9% (Consensus)
CPI inflation is expected to rise to around 2.2% in July, driven by a smaller drag from energy prices.
Core Inflation Rate YoY (June): 3.5% (Actual), 3.5% (Previous), 3.5% (Consensus)
Core CPI inflation is expected to remain elevated in the coming months, reflecting ongoing strength in wage growth.
Labour:
Unemployment Rate (June): 4.5% (Actual), 4.4% (Previous)
The unemployment rate is expected to rise slightly in the coming months, reflecting the continued restrictive stance of monetary policy.
Average Weekly Earnings Growth (May): 5.7% (Actual), 5.9% (Previous), 5.7% (Consensus)
Wage growth is expected to fall further in the near term, to just under 5% in 2024 Q3, but to remain elevated relative to the past.
Employment Change (May): 19K (Actual), -139K (Previous), 18K (Consensus)
Employment growth is expected to remain modest in the coming months, reflecting the ongoing impact of high inflation and tighter monetary policy.
Housing:
Nationwide Housing Prices YoY (July): 2.1% (Actual), 1.5% (Previous), 1.8% (Consensus)
House prices are expected to continue to rise modestly in the coming months, supported by a shortage of available properties and a gradual easing in mortgage rates.
Mortgage Approvals (June): 59.98K (Actual), 60.13K (Previous)
Mortgage approvals are expected to remain broadly stable in the coming months, reflecting the ongoing balance between demand and supply in the housing market.
Mortgage Lending (June): £2.65B (Actual), £1.26B (Previous), £1.20B (Consensus)
The annual growth rate for net mortgage lending is expected to pick up further in the coming months, reflecting the gradual easing in mortgage rates.
Business Confidence:
S&P Global Manufacturing PMI (July): 52.1 (Actual), 50.9 (Previous), 51.8 (Flash)
The manufacturing PMI is expected to remain above 50 in August, indicating continued expansion in the sector.
CBI Business Optimism Index (Q3): -9 (Actual), 9 (Previous)
Business confidence is expected to remain subdued in the coming months, reflecting ongoing uncertainty about the economic outlook.
CBI Industrial Trends Orders (July): -32 (Actual), -18 (Previous), -19 (Consensus)
The CBI Industrial Trends Orders balance is expected to remain negative in August, indicating that manufacturers expect new orders to decline in the coming months.
Consumer Sentiment:
GfK Consumer Confidence (July): -13 (Actual), -14 (Previous), -12 (Consensus)
Consumer confidence is expected to improve further in August, reflecting the continued recovery in real incomes and easing inflationary pressures.
Trade:
Current Account (Q1): -£21B (Actual), -£21.2B (Previous), -£17.6B (Consensus)
The current account deficit is expected to narrow in Q2, driven by a fall in imports.
Goods Trade Balance (May): -£17.92B (Actual), -£19.44B (Previous), -£16.1B (Consensus)
The trade deficit is expected to narrow further in June, reflecting the ongoing weakness in sterling.
Sources
Office for National Statistics (ONS)
Bank of England (BoE)
Trading Economics
S&P Global
Confederation of British Industry (CBI)
GfK Group
BRC - British Retail Consortium
Nationwide Building Society
Halifax and Bank of Scotland
Low Pay Commission