Does today’s GDP data heighten UK recessionary – or even stagflation- fears? reaction from investment experts

by | Sep 13, 2023

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Today’s GDP news from the ONS has revealed that UK GDP fell by 0.5% in July 2023, following growth of 0.5% in June 2023. Clearly, not good news. These data are worse than economists were anticipating and give some cause for concern about the direction of travel for UK growth for the rest of 2023 – and for the all important Bank of England interest rate decision expected next week.

Investment and other finance experts have been sharing their reaction to the GDP data and giving us their views on the likely impact on the UK economy and base rates as follows:

Jeremy Batstone-Carr, European Strategist at Raymond James Investment Services is suggesting that the latest GDP figures show there is little room for error amongst interest rate-setters as he comments:

“Today’s GDP drop of 0.5% provides further evidence that the UK economy’s resilience is starting to wane and suggests a shallow recession is increasingly likely over the remainder of the year.

 
 

“All sectors of the economy have started the third quarter under pressure, with the service and retail sectors particularly hard hit due to an unusually wet July.. On top of this, the lagged impact of earlier interest rate hikes are being felt throughout the economy. If banks continue to curtail credit and withdraw lending, the economy will fail to gain any real traction. The Bank of England should be careful of further rate hikes with this in mind.

“The labour market is of even more pressing concern to the Bank of England. Wage growth in the 3 months from May to July rose 8.5% year-on-year, above all forecasts, which potentially locks in a big increase in public pensions next April. Pronounced wage pressures, added to contracting activity, leave little room for error amongst interest rate-setters. The Bank of England must tread a very fine line to lower inflation without deepening the incoming recession through overzealous rate hikes.”

Abhi Chatterjee, Chief Investment Strategist at Dynamic Planner said:

 

“UK GDP came in lower than expected at -0.5%. While the economy had resisted stubbornly falling into recession, signs of lower growth were imminent from trends in consumer behaviour. With ONS reporting 67% of adults spending less on non-essentials and 50% shopping around more, households are not out of the woods. Higher oil prices in August will put increasing pressure on inflation going forward. This along with already high interest rates hit homeowners and renters, despite wage increases. All these will feed into the Bank of England’s interest rate decision in a fortnight.”

Marcus Brookes, chief investment officer at Quilter Investors said: “Today’s drop of 0.5% in GDP shows that the economy is buckling under the strain of repeated interest rate increases.

“Unfortunately the news shows just how complex and challenging the country’s economic landscape still is. The Bank of England’s governor, Andrew Bailey, weighed in recently signifying that interest rates are nearing their peak, especially after a 14th consecutive hike that saw them rise to 5.25% last month. Although this offers some respite to homeowners and the housing market, which has been grappling with high mortgage rates, the broader economy still remains under serious pressure illustrated by today’s lacklustre GDP figure.

 

“One positive that has emerged in recent weeks are revelations from the Office for National Statistics that the UK’s economic recovery post-pandemic seems to have been stronger than initially reported. Notably, 2021’s GDP growth saw an upward revision, revealing an 8.7% increase. This data suggests that by the time the Omicron variant emerged, the UK’s economy was already 0.6% above its pre-Covid mark, contrary to the previously believed 1.2% deficit.

“The Bank of England is now at a crucial juncture. With indications that interest rates are reaching their peak and inflation expected to decrease by the year-end, the direction they take could influence the nation’s economic trajectory. But as Bailey pointed out, decisions are now more nuanced. The Bank is no longer in a clear space where interest rate hikes are unequivocally necessary.

“On a global scale, the pound’s recent slump against the US dollar, dropping to around $1.24, underscores the prevailing uncertainty in the financial markets. This sentiment is further echoed by comments from both the governor and Chancellor Jeremy Hunt, suggesting that while inflation may experience a temporary blip, it will likely be halved by the end of 2023. Whether this means that the Bank can significantly reduce rates is yet to be seen and this will have a tangible impact on economic recovery.

 

“As the UK stands at this economic crossroad, two things are clear. Firstly, today’s data will be critical in challenging the country’s economic perceptions and will play a big role in the Bank of England’s future decisions. Secondly, with the election campaigning period looming, the state of the economy will undeniably take centre stage. The UK’s unique set of economic circumstances, coupled with global pressures, means that it remains on a precarious edge, with some even sounding the alarm bells for a potential recession in 2024.”

Derrick Dunne, CEO of YOU Asset Management, commented: “The UK experienced a sharp 0.5% drop in GDP for July, driven by weak performance in all of the key sectors.

“For The Bank of England, the balance between fighting inflation without inhibiting economic growth is becoming increasingly tough, and so we hope today’s release will offer food for thought as to whether high inflation – and subsequently, wage growth – are the most pressing issues on a forward-looking basis. 

 

“This is particularly pertinent with another interest rate rise now hotly anticipated next week. Since the restrictive effects of rate hikes can take between 9-12 months to be fully felt in an economy, it’s possible today’s drop will only be the tip of the iceberg in terms of economic pain.

“It’s understandable, if not acceptable, that this is the environment we find ourselves in. However, as the first half of 2023 has shown us, uncertain economic conditions do not mean poor investment returns. An appropriately diversified portfolio, underpinned by support from a high-quality financial adviser, is the best approach during these times.”

George Lagarias, Chief Economist at Mazars comments: “UK Output continues to slow down as inflation persistently eats away at consumers’ incomes. Thus, we are generally more apprehensive about growth going forward. Atop UK economic idiosyncrasies, the global economy is also slowing down. As US consumption remains resilient and energy prices are rising the central banks are being forced to maintain higher rates for longer, which will eventually be negative for growth.”

 

Commenting on this morning’s UK GDP data Melanie Baker, senior economist at Royal London Asset Management, said:

“Today’s picture of falling output in July follows a relatively strong June and likely partly reflects the wet weather we have had.  

“For now,  the picture of the economy coming from GDP data is still not awful, but not great. Given how much monetary policy tightening we’ve had and the cost of living crisis, it is still somewhat surprising that the UK economy has managed to avoid recession so far. I am not convinced that will continue to be the case and I continue to pencil a modest technical recession into my forecast. PMI business surveys have started to look consistent with falls in private sector output again and the labour market – which had been robust in recent quarters – is showing more signs of weakness. 

“We’ve still got a few data points to go before the Bank of England’s next monetary policy decision on 21st September. The CPI release will be the most important of those in my view and weigh more on their thinking than today’s GDP figures. I expect the Bank of England to hike rates again by the end of the year, though they might choose to keep rates on hold in September and wait for more data and their next forecast round in November. Ultimately, I think the domestic inflation picture remains too strong for them to be comfortable keeping rates at their current level.” 

Commenting on GDP data highlighting a sluggishness about the UK economy while smaller SMEs mustn’t be forgotten, John Glencross, CEO and Co-Founder of Calculus, said: “Today’s GDP data reflects a sluggishness surrounding the UK economy. While a technical recession remains at arm’s length, the challenging economic environment persists. We are, however, encouraged by the recent and significant revision of historical growth which changes the picture of the immediate post-pandemic recovery, notably compared to our European neighbours. Indeed, there are signs of long-term and credible support for UK business. The proposed launch of the London Stock Exchange’s intermittent trading venue or ‘ITV’ next year will further provide growth companies with access to new shareholders without having to list. It is positive that there appears to be continued effort and measures to make the UK a more attractive place for companies to grow and scale.

“Although initiatives such as the LSE’s ITV could provide invaluable access and support for UK companies, its target market is larger SMEs. It is the smaller end of the market which requires the attention and often where significant growth can occur. The Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) continue to support this section of the market – igniting growth and championing innovative UK companies. Calculus launched the first approved EIS fund 23 years ago. We are steadfast in our support of UK SMEs and with our invaluable experience of scaling companies in fast growing sectors, we can continue to provide innovative and tax-efficient venture capital investment opportunities for investors.”

Sekar Indran, Senior Portfolio Manager at Titan Asset Management, comments on today’s UK GDP update:

“Despite the soft GDP data, the balance of probability still lies with a quarter-point hike in the BoE’s meeting next week as the swaps market is pricing. Signs of notable labour market cooling have yet to materialise and core inflation remains stubborn. Next week’s CPI print falls the day before the MPC’s interest rate decision which all eyes will be fixated on.”

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