Market Report - 15/02/2024
UK enters technical recession ; Market awaits US retail sales figures
Following the release of key UK GDP data this morning, it has been announced that the economy has officially entered a ‘technical’ recession.
Around 12 months ago, Rishi Sunak made a pledge to grow the economy and half inflation. Whilst the inflation target has been achieved, evidenced by yesterday’s UK CPI data; the promise to grow the economy has thoroughly undershot expectations as data by the Office for National Statistics shows that it contracted in the final three months of 2023 – bringing a technical recession into the limelight.
According to the ONS ‘All three major parts of the UK economy contracted in October-December, today’s GDP report shows. The services sector, which makes up around three-quarters of the economy, declined by 0.2%. Production, which includes manufacturing, suffered a 1% drop in output, while construction shrank by 1.3%’.
Despite the confirmation of a technical recession in the UK, there is still evidence of marginal growth for 2023 when compared with 2022. This is because even though we have seen the economy decrease for two consecutive quarters across 2023; GDP is estimated to have increased by 0.1% compared with the same time last year.
There were declines in net trade, consumer expenditure, and government consumption across the final three months of 2023. After a downwardly revised decline of 0.9% in Q3, household expenditure decreased by 0.1% in real terms (adjusted for inflation) in Q4 2023 as consumers reduced their living expenses.
After declining by 0.8% from July to September, export volumes decreased by 2.9% from October to December. A 6.0% decrease in services exports was the main cause of the dip, offsetting a 0.8% increase in goods exports. Real government consumption spending decreased by 0.3% as a result of a decline in the health and education sectors.
According to the ONS, the decline in health might be the result of decreased activity brought on by NHS employees' industrial action.
Looking at the reaction of the FX markets to this news; The British Pound dropped to fresh lows for the week after it was confirmed the UK fell into recession in the second half of 2023.
The GBP/EUR rate fell to 1.1680 from 1.1710 in the minutes after the ONS said the UK economy shrank 0.3% quarter-on-quarter in the final quarter of 2023; whilst the GBP/USD rate also suffered a similar fate, falling from 1.2575 to 1.2550 in the immediate aftermath.
The word recession usually carries disappointing implications, but in this case the FX impact is expected to be relatively limited owing to the backwards-looking nature of these figures. I.E the market is more interested in what happened in January (as per Wednesday's inflation release) and February (that's why next week's PMI survey will be watched closely).
The next key risk events which will be eyed for FX volatility is this afternoons US Retail Sales data and tomorrow mornings UK Retail Sales data, before we have the eagerly anticipated PMI releases next week.