After warning for a few months that the UK was heading towards a recession, after the last meeting it came out and said that the recession had arrived. Of course, the data hasn’t been out to show it, yet. Since the technical definition of a recession is two consecutive quarters of negative growth, the data won’t be available until the first quarter of next year at the earliest.
But, we can see the first signs, which could be in the avalanche of data coming out of the UK before the market opens on Friday. There are several indicators that by themselves could move the market, such as the trade balance and production indicators. But the one most likely to get most of the attention from traders is the GDP reading.
What to look out for
UK Q3 GDP is forecast to come in at -0.5%, down from 0.2% reported in Q2. That could be the first of the required two negative quarters to technically say there is a recession. Annual GDP growth is expected to more than halve to 2.1% from 4.4% in the summer quarter.
There are a couple of mitigating factors, it should be noticed. Q3 has the resignation of Johnson as PM and the subsequent uncertainty about who would take over. Then there was the disastrous release of the now infamous Truss “mini-budget” which forced the BOE to intervene in the markets, and likely contributed to businesses holding back on investment. If PM Sunak can restore confidence among investors, some of those situations could improve in the fourth quarter. If this quarter’s date is not as bad as expected, the UK might technically squeeze through and avoid a recession. That might give the markets some opportunity to bounce even if there is a negative result.
Market reaction
UK Q3 investment is expected to low to 1.3% compared to 3.7% prior. Meanwhile Industrial Production is expected to come in negative again at -4.3% compared to -5.2% prior. Those factors could be important in how the market processes the GDP figures.
Higher energy prices and uncertainty in the economy are the main explanations for the underperformance in investment and industry. But if those figures weren’t as bad as anticipated, and in conjunction with a not as bad as anticipated result in GDP, it could give the markets some breathing room.
The BOE is the key
The worse the economy is, the less room the BOE has to keep fighting inflation. Which means that a worse than anticipated GDP number could translate into further pound weakness, complicating the BOE’s job. But better than expected GDP figures – and especially production – could mean that the economy has a little more room for the BOE to keep hiking or to hold the higher rates for longer.
That would likely support the pound, even though the stock market could react negatively. The other factor that has investors worried is the whole in the UK government’s budget. Increased investment, and better than anticipated growth, would help keep tax revenue flowing to the Treasury.
