The UK issues its regular avalanche of data before the market opens on Thursday, with trade balance, business investment, and manufacturing data all coming out at once. But what the market is most likely to focus on is whether the latest GDP figures confirm that the UK recession is deepening. The situation doesn’t look promising for sterling bulls.
Cable has turned to the downside this year as it has become increasingly apparent that the BOE will shift to easing mode. Whether it will catch up to the ECB is still an open question, but with the Fed staying put, the pound has weakened against the dollar. The change in BOE expectations reflects a shift in UK data, with slower growth finally pulling down inflation and opening the door to more easing.
Easing Into the Gloom
After its last meeting, when the BOE cut rates, it radically pared back its growth outlook for this year. Previously expecting the British economy to expand at a 1.5% rate, it downgraded that outlook to just 0.75%. The thing is, many analysts believed that the prior outlook was too rosy, and the new projections are more in tune with reality – and what the market is expecting. So, if the economic data underperforms, it might not move currency pairs as much since most traders are already expecting that.
The UK slipped into a technical recession at the end of 2024, and was initially supposed to experience a rebound through last year. That rebound would presumably keep the labor market tight, with higher services inflation leaving the BOE with room to hold rates up. But the deterioration in the economy, even if inflation is still above target, puts pressure on the BOE to start easing. That’s because high rates can make a recession worse, and could mean inflation falls below target which in the current circumstances could be even worse.
The Situation has Changed
Emblematic of the change is the radical shift in posture of BOE Monetary Policy Committee (MPC) member Catherine Mann. At the December meeting, she was seen as an uber-hawk, voting to keep rates elevated. Then at the very next meeting she swung to vote in favor of easing by 50 bps as a dovish dissenter.
The reason she gave for her radical shift was the deterioration in demand, saying that she expected inflation to fall back to target really soon. Demand is driven by the amount of disposable income consumers have to pay for higher prices. A slower growing economy, with less job creation and salaries growing at a slower rate, hurts demand. Even though the Budget is expected to cause inflationary pressures, its extra costs could reduce disposable income, hurting demand.
What to Look Out for
The UK will report both monthly and Q4 GDP figures, with the later likely to be the main reference point for the market. It’s projected that Britain’s economy grew at -0.1% in the final quarter of last year, down from the 0.0% that it saw in Q3. That means the country is only technically not in a recession – unless the Q3 figure is revised lower by just a decimal point.
Of course if the figures beat by just one decimal, it would be significant because it means that the risk of a technical recession is put off for another six months. That could provide a substantial psychological relief move. On the other hand, the persistent negativity could simply harden the already established expectations that the BOE will hike at the next meeting.