UK GDP: Recession Risks Still on the Table?

GDP data from the United Kingdom is due to be released on Friday, Jan, 12th at 9:00 AM GMT+4 (Dubai Time). The UK economy is expected to have grown by 0.2% m/m compared to a previous figure that showed a weakening economy of 0.3%. The decline was mostly due to weaker manufacturing activity.  The data release could potentially impact the market in several ways. If the figure turns out higher than expected, this could boost the British pound according to analysts, due to increased confidence in the UK economy, and UK stocks. However, if GDP shows less than expected, the Pound could weaken, potentially leading to losses for UK-listed companies, as analysts suggest. A weaker GDP could trigger a more significant sell-off, while a stronger GDP may not lead to a major rally.

However, the probability of a technical recession is off the table. Even if the labor market is still tight, there are still no indications of job losses that are more commonly linked to recessions. A tight labor market means that the demand for labor is declining while the supply of labor is rising, which can be seen in the decline in vacancies in this quarter for the 17th consecutive period. This represents the longest consecutive run of quarterly declines ever recorded, but still above pre-pandemic levels.

Positive real wage growth could be offset by a stagnant UK economy in the first half of this year, provided higher interest rates keep falling. With the Bank of England still largely focused on inflation data, and wage growth and services inflation both projected to remain sticky in the near future, a rate cut is not expected before the central bank sees a meaningful decline in inflation. In his latest talk, BoE Governor Baily hopes that the recent decline in mortgage costs will continue. 

"Obviously we have had a big change in market interest rates in the last few months and so the cost of mortgages is coming down," Bailey said in parliament at a Treasury Committee hearing. He also mentioned that he did not want to discuss the future path of the monetary policy, but is following the data to guide his next moves. "But let's just take the market for a moment - obviously that is feeding through into mortgage costs and I hope that is something that continues," He added.

Price stability is the central bank’s priority, and the BoE is trying to strike a balance between protecting the economy by lowering high-interest rates, while maintaining a restrictive stance.


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