UK avoids recession, but fragility remains while investors take stock ahead of Fed interest rate decision

by | Jun 14, 2023

  • UK GDP is estimated to have grown by 0.2% in April 2023, with consumer facing services growing 1%.
  • The construction sector fell by 0.6% in April 2023, following growth of 0.2% in March as interest rate uncertainty increased
  • UK escaped recession again with GDP up by 0.1% in the 3 months to April.
  • Government borrowing costs remain near 15-year highs amid high interest rate expectations.
  • Junior doctor walk-outs risk delaying treatment further for high numbers of long-term sick, adding labour market pressure.
  • US stocks set to tread water ahead of Fed decision after scaling fresh heights.
  • Oil price clings onto gains after China’s introduced stimulus measures.

Susannah Streeter head of money and markets, Hargreaves Lansdown provides her analysis on what’s going on in the markets today as follows:

’With consumer spending holding up, particularly in hospitality, and the impact of strikes more minimal, the UK economy has eked out growth in April, but stubborn inflation is still casting a shadow over the slightly sunnier outlook.  

Although the UK continues to swerve a technical recession and buck earlier forecasts, the situation is fragile, with growth of just 0.1% over the three months to April.

The construction sector had seen an uptick in activity in March but contracted by 0.6% in April, with customers putting off repair and renovation projects amid uncertainty over the direction of interest rates.

With recent data showing prices and wages are still rising sharply, further rate hikes could act like a vice-grip on spending power going forward.  Fresh strikes have also been called, which are set to continue to act as a drag on growth.

However,  the path of rates ahead, and the economy, is still clouded in uncertainty.  This is partly because the current reaction on markets could be doing the Bank of England’s job for it. The expectation that rates could head to 5.5% has seen the better mortgage deals whipped away, which will dent the finances of 1.6 million households having to re-mortgage this year and is already set to reduce demand for goods and services.’’

UK government borrowing costs are at levels not seen since the financial crisis, with yields on 2-year gilts at 4.89%. It’s sparked fresh worries that mortgage rates could be pushed up even further. It’s also set to weigh heavily on the costs of government borrowing, with central government current expenditure having surpassed forecasts in April, partly because of higher interest payments on debt.

An unwillingness to add to the debt pile is partly why ministers are resisting union pay demands, with industrial tensions prompting today’s walk-out by junior doctors. However, it may be counter-productive over the longer-term given that the ongoing dispute is likely to cause waiting lists to lengthen, and already delayed treatment is thought to be one of the reasons behind the the high numbers of long-term sick. With potential workers incapacitated due to illness, there are fewer applicants for vacancies, which means jobs market tightness is expected to remain, which is considered to be a key inflationary pressure.

Shares on Wall Street scaled fresh heights, rising to the highest level this year, ahead of the closely watched Fed decision on interest rates. Investors are expected to largely tread water ahead of the announcement, expecting hikes to be paused, for now. If they are, focus will shift to  chair Jerome Powell’s comments for indications about the future path of rate hikes, with some expectation that another rate rise will be kept firmly in the Fed’s back pocket in case upcoming data points to inflation staying obstinately elevated.

China’s latest stimulus measures aimed at boosting lending and demand has helped lift the oil price, with Brent crude back above $74 a barrel. It’s likely to hover around that level until the Fed’s decision and Powell’s comments are digested, given that they will be used to guide expected demand in the US economy as it teeters towards a mild recession.’’

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