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Market Report: UK GDP shrinks 0.3%, recession risk amplifies and BoE vows to end pension fund support

Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown:

The UK’s GDP swung to negative 0.3% in August, which was worse than expected and compared to revised 0.1% growth in July. The nation appears to have officially leapt from stagnation to contraction once again, in the latest instalment of the monthly GDP rollercoaster, with economic activity ebbing and flowing erratically for the last nine months.

This latest data set unfortunately gels with the IMF’s recent warning that 2023 will feel like a recession for many people, and that the worst of the global growth slowdown is yet to come. Investors are waiting for signs that the recession has arrived, and while on traditional metrics, the UK isn’t there yet, today’s announcement takes us one heavy step closer to that reality.

A plethora of unhelpful external headwinds are blowing, holding back the UK’s ability to grow its economy. At the same time, the UK consumer base is utterly bone-tired with political uncertainty, concerns about higher-for-longer inflation and the government’s ability to get things under control, following a public berating of government policies by the IMF. These all feed into a reduced willingness, and ability, for people to spend their money within the economy.

Further market jitters have been drummed up by Bank of England governor Andrew Bailey, who has given pension funds and other firms three days to sort out their affairs. The bank’s emergency bond market interventions are coming to an end by Friday, despite significant fears of a cliff-edge and pleas from investors. The initial interventions have been to hold-back flash sales of bonds from pension funds, who are the primary holders of index-linked debt.

Bailey’s promise to stop buying bonds can’t be dressed up as anything other than a significant problem for the pension industry. The Bank of England may well have just caused the spark which will result in a large-scale meltdown for gilts. On paper it’s easy to criticise the decision to halt help, but the reality is that these stabilising efforts complicate the Bank of England’s ability to meet its responsibilities in its other realm: monetary policy.

In terms of what the decision means, clearly it’s adding to uncertainty and is causing further pressure on the pound, with sterling dropping sharply against the dollar to below $1.10 after Mr Bailey’s statement. Brand Truss is not going to have an easy rest of the week while the countdown ticks down, and the PM’s office, and the wider market will be watching bond markets with bated breath next week.

Brent crude futures fell below $94 a barrel earlier on Wednesday, marking the third straight decline. The IMF’s downgrade of global growth predictions has pumped fear into oil markets, with a recession guaranteed to lower demand for the black stuff. On a ten-year view, oil prices are still reasonably elevated, especially when compared to the artificially-low points of the pandemic. So, while consumers may welcome the recent cooling in pricing, there’s a long way until the floor can be seen.

Housebuilding giant, Barratt Developments has warned that the outlook for the rest of the year is now less certain, owing to the availability and pricing of mortgages. A deterioration in the affordability of mortgages, especially for first time buyers, is just about the biggest spanner that could be thrown at the builders. While the UK still has a fundamental shortage of houses, the medium term for the likes of Barratt looks hazy at best, bleak at worst.

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