UK’s GDP, CPI : Recession vs the BOE

The UK’s week-long data barrage continues tomorrow with the release of key CPI figures. That is followed on Thursday with Q4 GDP numbers, shedding light on the state of the UK’s GDP and its performance in the fourth quarter of the year. Investors are likely to be very interested in the contrast between those figures, as the BOE is split between hiking and cutting. Then Friday sees the release of retail figures, which could give some insight into the resilience of the UK consumer.

The UK is expected to squeak by avoiding a recession by the bare minimum. Normally, that lack of growth would be a sign that inflation pressures would be lower. But the expectation is that inflation will keep beating the target by at least double. And in fact, might actually increase. This would keep pressure on the BOE to keep rates high, even as calls for easing pick up as the economy struggles.

First to Hike, Last to Cut?

The latest global inflationary cycle was largely driven by increased government spending to deal with the pandemic. So, the effect has been present, if not uniformly consistent, around the world. The BOE was the first of the major central banks to address the problem of rising costs. While that might have led to the expectation that it would have controlled inflation sooner, and be the first to exit restrictive policy, that hasn’t happened. Other central banks have been more aggressive, if slower, in their rate hikes.

That could mean the relative weakness of the pound as other central banks were hiking faster might revert as other central banks cut faster and the BOE is left fighting inflation for longer. That is, as long as the country can retain the confidence of investors by avoiding a recession, even if it’s by the bare minimum, like Europe.

Finding a Way Out

It should be noted that typically government deficit spending increases inflation, but the UK government has actually been reducing its debt recently. Spending projections call for even more debt reduction in the coming years. The problem is that if the economy isn’t growing, the ratio of debt might not improve. And the inflationary effect relies more on the ratio than the absolute numbers.

In other words, more than getting inflation down, it might require the economy to increase enough to keep up with the government’s spending needs in order for inflation to be tamed. At least, that seems to be the view among BOE doves. And a persistently depressed UK economy might see their numbers swell, which could weaken the pound.

What to Look Out for

Tomorrow sees the release of UK headline inflation, which is expected to have a minor increase to 4.1% from 4.0%, with analysts pointing towards energy costs and the effects of the Red Sea crisis. That is likely to weigh much less on monetary policy as the core rate, which is expected to keep its tendency to slowly decline to 5.0% from 5.1% prior.

On Thursday, the UK is expected to report that its Q4 GDP grew at 0.0%, compared to -0.1%, which would be the bare minimum to escape a recession. Naturally a mere one decimal miss here could be significant for the psychological factor of the country falling into a technical recession.

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