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UK GDP data released this morning confirmed that the UK just barely fell into a technical recession at the end of 2023. But, having already seen monthly estimates for both October and November, this news will not come as a shock to many analysts.
If anything, the extent of the slowdown makes recession talk at present feel a little hyperbolic to us, though admittedly, the Q4 contraction was a little larger than we had anticipated.
The UK economy shrank by -0.3% in the fourth quarter, against expectations for activity to have fallen by just -0.1%. While this sharper-than-expected slowdown will now raise questions around growth heading into 2024 for markets, an improvement in forward-looking indicators and growing real incomes that should support consumer demand, both suggest to us that the UK economy will rebound in the new year.
Therefore, whilst the pound has weakened off the back of today’s release, we think sterling is beginning to look cheap compared to both the dollar and the euro, having fallen 1.7% off its February high against the former, and 0.6% against the latter, offering an attractive entry point for long sterling positions.
Heading into today’s release we thought it would be a high bar for the UK to avoid an economic contraction in Q4. Having already recorded a slowdown of -0.5% in October, this was only partially offset by initial estimates of 0.3% rise in activity for November, with this now being revised down to 0.2% today as well. Notably, retail sales were weak in December, delivering a MoM fall of -3.2%, a performance that left retail sales for Q4 as a whole looking distinctly underwhelming. More to the point, it left an expansion in activity for December looking highly unlikely. As such, the -0.1% economic contraction was hardly a surprise, nor was the fact that this was led by a fall in services activity, which also fell by -0.1% on the month. Interestingly though, and we suspect a sign of better things to come, both December’s GDP and services readings outperformed expectations by 0.1pp, with the underperformance in the quarterly figures fuelled primarily by a downgrade to prior months data. Moreover, whilst making up a far smaller portion of the UK economy, this better-than-expected performance was most notable in manufacturing, which expanded by 0.8% in December, despite consensus expectations looking for a -0.1% fall.
Looking forward, we expect activity to pick up in the first half of the new year.
ignificantly, composite PMI readings improved towards the end of 2023, suggesting a recovery is in the offing. Having slipped below the 50 no-change mark in August 2023, they subsequently printed at 50.7, 52.1 in November and December, respectively. This momentum continued into the new year too, with the January report delivering a composite print of 52.9. In addition, consumer demand, which appears to have been a major drag on economic activity at the end of 2023, is also set to improve, we think. Growing real wages should support rising consumer spending, a fact that we expect to be visible through an improvement in tomorrow’s retails sales data, which we will be looking closely at for signs of a nascent recovery. All told, we think talk of a recession at the current juncture is likely overblown, even though the data meets the technical definition of two consecutive quarters of negative growth. Notions of a more sustained slowdown are hard to square with the improvement in forward looking indicators, a resilient labour market and what should be growing consumer confidence.
As such, perhaps the biggest impact of today’s release is likely to be the blow it temporarily deals to sentiment. Whilst this is playing out so far this morning, weighing on the pound, in our view this now offers a good opportunity to enter long sterling positions, with improving fundamentals likely to see this weakness reversed in coming weeks, especially against the euro when February’s flash PMIs are released towards the end of this month.
Author:
Nick Rees, FX Market Analyst