13 May 2024: The UK economy grew by 0.6% in Q1


  • UK Growth outpaced the U.S. and Eurozone in Q1
  • Hopes of a rate cut this year are fading
  • Reliance on industrial output will not save the Eurozone
GBP – Market Commentary

A spectacular exit from recession!

For the first time in more than three years, the growth rate in the UK outpaced that seen in the U.S. and the Eurozone.

UK GDP grew by 0.6% QoQ following a 0.3% fall in Q4. This is a spectacular exit from the recession seen at the end of last year and will provide some energy to the General Election campaign that has already started despite the date for the vote not being announced yet.

This unexpected surge signals a significant achievement, breaking free from what had been perceived as a prolonged period of “technical stagnation.” The data highlights an overall improvement across various economic sectors, with particularly notable growth observed in the basic services sector.

The UK has reinvented itself as a services-based economy, with manufacturing input concentrated primarily around the hi-tech and pharmaceutical sectors.

The effect of the improved growth figures is not yet being reflected in the lives of ordinary people, a fact that Rishi Sunak freely admitted. However, both the Prime Minister and the Chancellor spoke of their belief that “sticking to the plan” is beginning to work, although there is still a long way to go.

Both sides are beginning to “campaign hard” now, with the London Mayor telling reporters that the Government is “gaslighting” the public despite the encouraging data, since “on the ground”, there has been little improvement.

The data will have concerned the Labour Party, which, despite its huge opinion poll lead, will be concerned about a continued improvement in the economy.

There is disagreement among economists about productivity and the need for it to grow to support the economy.

As the country moves away from a manufacturing and industrial base which relies on improved productivity to grow, towards a more services-based economy in which productivity growth is of less importance, the dynamics of the makeup of GDP will irrevocably change with less input needed to provide the same result.

Productivity is a measure of performance that compares the output of a product with the input, or resources, required to produce it. The input may be labour, equipment, or money. Several of the inputs become redundant in a services-based economy.

Tomorrow, the April employment report will be published. It is expected that wage growth will slow to around 5.3% from 5.6% in March. This is unlikely to encourage the MPC to cut rates, despite the market’s hope of a cut in June.

Last week, Sterling fell to a low of 1.2445 but rallied to a high of 1.2542 as the GDP data called into question the need for a cut in interest rates. It ended the week on the “front foot” although it will mostly be driven by monetary policy developments across the G7.

USD – Market Commentary

A plethora of FOMC members see no cuts this year

There is a growing belief that the Federal Reserve may not feel sufficiently confident about the continued fall in inflation to be comfortable in cutting interest rates at all this year.

At the beginning of the year, it was considered a certainty that the FOMC would agree to up to four cuts in rates this year, beginning first in March, then in June.

That timetable has been pushed back to September, with the latest prediction being for a cut around the time of the Presidential Election in November.

As recently as last week, Fed Governor Michelle Bowman spoke of the possible need for rates to be increased if inflation remains “sticky”. She spoke of the fact that given current conditions, between 2.5% and 3% may be the limit for inflation without a rise in interest rates.

No one is yet questioning that the cycle of rate increases ended with rates at their current level since inflation was falling at an encouraging rate.

In the latter part of the week, Minneapolis Fed President, Neel Kashkari, opened the conversation about the possibility that rates will remain unchanged for the whole of 2024.

He was quickly joined by San Francisco Fed President Mary Daly, who agreed that rates need more time to drive inflation down to the 2% target, and Raphael Bostic from the Atlanta Fed, who said that the fall in inflation was slowing up. Thomas Barkin from Richmond, gave a vague hint of a rate hike, saying that “with time and the appropriate monetary policy. Inflation will hit the 2% target.”

Finally, Austen Goolsbee from Chicago voiced concerns that the housing market is still remarkably buoyant, although he refused to accept that inflation has become “stuck”.

Members of the FOMC are trying to be both realistic and open about their intentions going forward, but do not wish to pin their hopes too much on job creation, which appeared to have begun to fall according to the latest data.

Consumer price Inflation data is due to be published on Wednesday. It will be by Producer Price numbers. This will show the prospects for a continued fall in inflation. It is expected that “factory gate” price increases will remain unchanged at 2.4%.

CPI is likely to have fallen to 3.6% in April, down from 3.8%.

The dollar index is still well-supported given the hawkish comments from FOMC members. Last week, the index rose to 105.74, closing at 105.30.

EUR – Market Commentary

Inflation has become far less “scary”

It may be old news, but it is still a fact that the Eurozone economy is crying out for a cut in interest rates. Although the ECB’s Governing Council is still concerned that a rate cut may re-ignite inflation, possibly to the extent that the cut has to be reversed, consumers are unlikely to begin visiting shops again in decent numbers until rates have been cut.

The market still believes that a cut will take place at the Governing Council’s next meeting, which takes place early next month, although there is plenty of time for that expectation to be reversed.

Philip Lane, the ECB’s Chief Economist, appeared to be in favour of a cut when he spoke last week, he also believes that the ECB, once committed to cutting rates, will make between three and four cuts this year.

His comment that a rate cut in June would “not be a surprise” is about as close any ECB official has come to a confirmation.

Wage data has “normalised”, but without a basis on which to judge the ECB’s expectations, it is difficult to use a data-driven approach to confirm a cut is due.

Christine Lagarde has encouraged talk of a cut in rates before the Fed acts, saying that the ECB is not Fed-dependent.

There have been concerns expressed that by “going it alone” the ECB risks the equilibrium of the market. Robert Holzmann, the Governor of the Austrian Central Bank, has been particularly concerned about the fate of the euro if there is a decoupling of the Euro from the dollar.

The inflation that is caused by the “collapse” of the Euro may cause the ECB to need to raise rates again to provide some stability. That is an extreme view since the ECB will only cut rates at a pace that is driven by the prevailing circumstances.

Last week, the market still believed that rates would be cut in June, and the Euro was driven down to a low of 1.0723. However, the concerted selling will only begin after the rate cut is confirmed, so it recovered to close at 1.0770.

Germany and Spain will publish inflation data tomorrow, with both expecting further falls in the headline rate.

Q1 GDP numbers for the Eurozone are due for release on Wednesday. It is predicted that the economy will have grown by 0.3% QoQ.

Finally, inflation data is due for publication on Friday. Both the headline and core rates are expected to remain unchanged at 2.7% and 2.4%, respectively.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.