This week has an avalanche of economic data out of the UK. But the figure that many traders are likely to focus on is the release of Q2 growth figures on Thursday. That’s because of the surprisingly hawkish stance the BOE took last week when it cut rates. Inflation remains high, but a slowing economy would likely put downward pressure on prices.
Earlier this week, we got some evidence of that. UK June unemployment stayed unchanged. But the growth in wages slowed more than expected, rising just 4.6% instead of the 5.0% a month earlier. The number of open jobs in Britain continued to fall and is now below pre-pandemic levels.
Enough Slack to Cut?
BOE Governor Andrew Bailey has been warning for well over a month now that the labour market is showing signs of “slack”. That is important in this context because it was tightness in the job market that kept the BOE from easing earlier, when inflation was lower. If that slack continues, then consumer demand might diminish as people have less disposable income.
It’s also a sign that the British economy is under increasing stress. Of the eight jobs reports since the Autumn budget, seven have shown job losses. The increased burden from higher taxes is undermining confidence among UK businesses, who are less and less likely to hire. Also, the job market is a lagging indicator of economic health. If the market is loosening, then the economy has already softened. That means that the BOE might find itself in a situation similar to the Fed last year, cutting rates quicker than anticipated to catch up with the data.
What the Figures Say
The UK economy is expected to slow to just 0.1% growth in Q2, when the preliminary numbers are given out on Thursday. That’s down from the surprise 0.7% seen in the first quarter. However, tariff impacts are expected to have played a role, as American companies pre-loaded orders ahead of tariffs, increasing the Q1 number at the expense of Q2.
After April and May GDP reads were both negative, economists are expecting June to keep the quarterly figure from falling into the red. June UK GDP is forecast at 0.2% growth compared to -0.1% a month earlier. But if that growth doesn’t manifest, then Britain could be just two months away from officially being in a technical recession. That might be enough to convince more BOE officials to switch to the dovish side.
Getting Inflation Down Enough
According to the BOE’s estimates, inflation is expected to remain above target for the rest of this year and next year as well. This is the justification for keeping interest rates high for now. Those higher rates are likely to drag on the economy, reducing growth.
That’s the idea, after all. A slower-growing economy means less monetary circulation and therefore lower inflation. But the accumulation of uncertainty around tariffs, higher taxes and elevated interest rates can cause the economy to slow down too much. This would push inflation below target, and mean that the BOE will have to cut rates to boost the economy.
