What to expect from UK GDP figures on Friday

The latest UK GDP figures, due on Friday at 7am, are expected to show that the economy expanded by 0.2% in June month-on-month versus a contraction of 0.1% in May, which was better than consensus estimates for a shrinkage of -0.3%. If June’s GDP comes in better than -0.1%, then the British economy is on track to avoid a contraction in the second quarter.

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Second-quarter GDP is expected to grow by 0.2% year-on-year, in line with the first quarter also at 0.2%, which was the weakest rate in two years as rising inflation and higher interest rates take their toll. Quarter-on-quarter, Q2 GDP is seen coming in flat dropping from a reading of 0.1% in Q1.

A trio of bank holidays in May hurt activity in the manufacturing and construction sectors as workers enjoyed the extra days off. In June, the celebrations ended, providing a back-to-work boost for the economy.

According to June’s retail sales figures, the record-breaking heatwave supported sales in supermarkets and department stores, partly driven by high inflation which flattered food sales, lifted by higher prices rather than stronger volumes. Lower fuel prices versus last year during the energy crisis are also likely to provide a tailwind to fuel sales and in turn June’s growth figure.  

However, the boiling hot temperatures are likely to have dampened productivity, particularly in agriculture and construction. They also caused problems in the transport sector with passengers on trains and planes facing delays and cancellations.

On balance, June’s figures are likely to paint a rosier picture, with the economy so far managing to fend off a recession this year. But the second half of 2023 looks set to be more challenging as the Bank of England’s 14 consecutive rate hikes take their toll. The latest UK PMI figures for July pointed to a slowdown in economic activity with the services sector reading falling to six-month lows and the manufacturing sector in contraction territory, hitting seven-month lows.

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There are an estimated 2.2 million households on variable rate mortgages and another 700,000 on fixed-rate mortgages due for renewal by the end of the year, landing millions with much dearer mortgage bills in 2023, and less money left over for discretionary spending as consumers feel the squeeze.

The National Institute for Economic Research, a think-tank, predicts there is a 60% chance of a UK recession by the end of next year, while the Bank of England anticipates unemployment will rise further.

Although inflation is finally starting to cool with data out next week expected to show that wage growth is outpacing inflation for the first time in 14 months, the benefit of higher earnings is being bulldozed by higher rents and mortgage repayments. Plus, strong wages raise the risk of second-round inflationary effects that could bring about the need for further monetary tightening from the Bank of England.

In terms of the markets, after the pound was the best-performing major currency in the first half of 2023, sterling is losing its mojo, depreciating over the last month against the US dollar as the end of the central bank’s rate-hiking cycle draws closer.