30 November 2023: Only Germany to have slower growth than the UK in 2023

30 November 2023: Only Germany to have slower growth than the UK in 2023


  • OECD slashes UK growth forecast
  • The U.S. economy grew by 5.2% in Q3
  • Inflation is falling significantly in Germany and Spain
GBP – Market Commentary

OECD predicts annual growth of just 0.5%

A new forecast from the Organization for Economic Cooperation and Development (OECD) was published yesterday, and it revealed that it predicts that the economy will grow by only 0.5% this year and just 0.7% in 2024.

The OECD urged Jeremy Hunt to revisit his decision to keep the triple lock and the state pension and other benefits.

This is an undertaking from the Government that guarantees a rise of the highest of average wages, the rate of inflation in September of the year prior to the increase that takes place in April each year, and 2.5%.

This means that a rise of 8.5% is “locked-in” for next year, a cost that the OECD claims the country simply cannot afford.

Meanwhile, GDP growth will continue to be “sketchy” only forecast to rise by 1.5% in 2025.

These forecasts are made using current conditions as a template, and it is unlikely, given the current opinion polls, that the current Government will still be in power at the end of next year. However, that is no guarantee that there will be significant additional growth under a new administration.

UK growth is predicted to be well below the OECD average, with only Argentina and Germany performing worse.

The OECD warned that the Government needs to swiftly implement planned supply side reforms to boost potential growth, or face an extended period of below average growth.

Average inflation is expected to be 7.3% this year, falling to 2.9% next year and 2.5% in 2025, while interest rates are expected to remain high averaging 4% in 2024.

Having claimed that the economy had “turned a corner” a belief not shared by the Governor of the Bank of England, the Chancellor faces a period of soul-searching before he must decide on further changes to fiscal policy in next April’s Budget.

At a stroke, the news from the OECD destroyed the nascent feelgood factor being cautiously welcomed in by the Prime Minister.

After being savaged by the Leader of the Opposition over his cancelling a planned meeting with the Greek Prime Minister, Rishi Sunak announced thirty billion pounds of fresh investment in the UK from overseas which lightened the mood a little.

While the benefit of that is clear, the news was submerged below the poor forecasts for the economy.

The pound ended its recent run of higher daily closes. Yesterday it fell to a low of 1.2664 and closed at 1.2692.

USD – Market Commentary

The Fed will be concerned about the inflationary consequences of the growth data

If the U.S. economy is heading for a recession, it is camouflaging it well.

GDP in the third quarter, which was originally believed to be an extremely healthy 4.9% was upwardly revised to 5.2% in the latest data that was released yesterday.

The most notable change to the forecast came from a considerable increase in spending from the Federal Administration.

President Biden has delivered his Inflation Reduction Act, which will supply additional funding of $210 billion over the next decade in “green” subsidies, although it is hard to understand how an increase in Government spending can lead to inflation reduction

Rises in consumer spending, which was believed to be slowing down, leading to fears that households are beginning to show concerns that interest rates will stay “higher for longer”, remained at a healthy average for the period of 3.6%.

The flip side of this is that interest rates may not be cut for some time, since the Fed will be concerned about the possibility of the economy overheating.

The first cut is priced in for May, but this may now be even sooner since Fed Governor Christopher Waller, considered the most hawkish member of the FOMC, hinted this week about lower rates should inflation continue to fall.

The FOMC has continued to put out contradictory statements. This is confusing the markets and had been damaging the dollar.

The data did, however, provide fresh impetus to the expectation that the economy will experience a soft landing.

It may be too soon for this to be considered following the release of data for November, but provided there is no shock delivered from the Black Friday and Cyber Monday sales figures and both employment and inflation continue on their current path, there is no reason to believe that Jerome Powell won’t see his wish granted in January.

Yesterday’s news saw government bond yields fall and equity markets rally.

The data that has been released so far for the fourth quarter shows that while GDP may not top 5.2% it is likely to remain elevated, which makes finding a balance between inflation and growth a little trickier for the Central Bank.

The data drove the dollar to end its trend lower. The index rose to a high of 103.1 and closed at 102.86.

The market now awaits the publication of the November data for jobs and inflation, which it hopes will cement a soft landing.

EUR – Market Commentary

German headline inflation falls to 2.3%

The inflation data for several Eurozone member nations was released yesterday, and it fell substantially, led by Germany and Spain. Consolidated data for the entire Eurozone is due for release later this morning, and there is no reason to believe that it too will see a considerable fall.

While the ECB has been strident in its comments that interest rates will not be lowered soon, the output data for the region, especially Germany, which is likely already in recession, may force its hand.

There was no official comment on the data yesterday, but ECB President Christine Lagarde is speaking later today and may be forced into giving her view on the data.

The ECB is unquestionably showing a significant level of caution, which is not justified by the rate at which inflation is currently falling and the parlous state of the economy.

The Central Bank has spent a large part of this year ignoring growth or the lack of it, and must now be closer to believing that risks to the economy are balanced or maybe even skewed towards a level of growth that will necessitate stimulation.

The price of energy, raw materials and transportation have stabilized and, in some countries, fallen over the last quarter, but, in general, the cost of foodstuffs, even those grown in the region remains stubbornly high.

A part of the blame for this must be apportioned to the war in Ukraine, which has driven the cost of chemical fertilizers significantly higher.

Lagarde and her more hawkish colleagues on the ECB Governing Council will doubtless call for a degree of patience to be shown while inflation is proven to be defeated. but the window for action before a savage downturn commences is closing rapidly.

The euro briefly rose above the 1.10 level yesterday but ran into very strong selling pressure. It is likely that this will cap any further progress, especially if the Eurozone-wide inflation data is as benign as the individual members suggest.

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.