Why Traders Should Not Celebrate UK's GDP Data

Economic figures released today indicated that the United Kingdom's economy has grown faster than anticipated since the start of the epidemic. The statistics boosted Sterling, the country's currency, which rose against the dollar, and revived investor confidence in the United Kingdom's stock market to some extent. The UK economy is still very much in the midst of a cost of living crisis, and the storm clouds are only becoming worse in terms of the issues that the Bank of England confronts, so it is too early to open champagne bottles and celebrate any sort of success.

Background

The updated GDP figures released today revealed that the UK's GDP growth has exhibited far better performance than many were expecting and has been faster than the two most significant countries in the Eurozone, France and Germany, since the epidemic. New estimates showing economic performance post-COVID were issued by the Office for National Statistics (ONS) earlier this month. Despite predictions of a 0.2% decline, this statistic confirms that the UK economy has increased by 1.8% since the beginning of the epidemic. According to the numbers, economic growth in the first three months of this year was 0.3%, above expectations of 0.1% growth. The final GDP q/q data matched the estimate of 0.2%, which was the same as the previous reading.

The UK's Chancellor of the Exchequer, Jeremy Hunt, sought to stir up as much enthusiasm as possible after today's numbers by proclaiming that the country's economy is rebounding quickly from the epidemic, proving his skeptics wrong. He pointed out the fact that the UK's economy recovered the fastest among the G7 since the pandemic, and the country's GDP showed better growth than Germany and France. The truth, however, is that the UK's economy is falling behind every other G7 nation with the exception of those two. The Chancellor may be left with a sour taste in his mouth when the GDP figures for the other G7 nations, which are also undergoing adjustments, are finally announced.

Headaches

In spite of today's uptick in the pound thanks to the revised GDP numbers, the drag from recent interest rate hikes is just now becoming apparent. The Bank of England has increased interest rates 14 times since December 2021 to control inflation, and only recently has it kept its interest rates at their current level, which itself was a big surprise for the markets. There were two main drivers of the bank's decision: First, inflation readings showed improvement in the most recent statistics, with readings dropping to 6.8% from 7.9% but still being much higher than the BOE's inflation objective of 2%. Second, the Bank of England (BOE) refrained from raising interest rates despite the fact that inflation has improved, because doing so would have made the situation even more difficult when the BOE was confronted with an inflation reading that was less than ideal. The central bank, using the latest inflation data as an excuse, has effectively bought itself more time.

The current crisis

The cost of living crisis is a persistent problem that shows no sign of going away. Consumers have been backed into a corner as borrowing rates have risen, reducing their discretionary income. The administration has not learned its lesson from Brexit and other self-inflicted wounds, and it has continued to escalate tensions with China, the world's second-largest economy. Mortgage rate approval has also been declining, and foreign direct investment is trending downward. Due to intense pressure to meet their goals, private equity groups are flooding the market with underperforming assets, further driving down home values.

Moving forward

A conclusion that the UK has dodged Armageddon based on today's statistics is, in my opinion, incorrect; the BOE is still likely to raise rates further. The best-case scenario would be for the rates to stay higher for longer while the BOE has little to no room left to play with its interest rate hike cycle before pushing the country into a deeper disaster zone.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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