The UK Economy Contracted by 0.1% in May Versus a 0.3% Forecast

Highlights

• It was a busy start to the day on the UK economic calendar, with the UK economy in the spotlight.
• The UK economy contracted by 0.1% in May, increasing the chances of a deeper BoE-fueled economic recession.
• However, the US PPI Report and US jobless claims will also influence later today.

It was a busy start to the day on the UK economic calendar. The UK GDP Report garnered interest this morning. After the hotter-than-expected wage growth figures, a resilient UK economic activity would fuel bets on a more hawkish post-summer Bank of England.

The UK economy performed better than expected in May, contracting by 0.1% versus a forecasted 0.3% contraction. In April, the economy expanded by 0.2%. Year-over-year, the economy shrank by 0.4% versus 0.5% growth in April. Economists forecasted the economy to contract by 0.3% in May and by 0.7% year-over-year.

According to the Office for National Statistics (ONS),

• The UK economy stalled in the three months to May 2023.
• Production was the main drag on the economy, with output falling by 0.6% in May after a 0.2% decline in April.
• Construction sector activity also continued to weigh. The sector contracted by 0.2% after a 0.9% decline in April.
• The all-important services sector stalled in May after growing by 0.3% in April.
• Significantly, consumer-facing services declined by 0.2% after 1.1% growth in April.
• Despite the contraction in May, the UK economy sits 0.2% above its pre-COVID-19 levels.

The markets are betting on the BoE to push rates beyond 6%. Today’s GDP numbers should provide some relief but may also allow the BoE to continue pushing rates higher after the summer break.

GBP to USD Reaction to the UK GDP Report

Ahead of the UK GDP Report, the GBP to USD fell to an early low of $1.29833 before rising to a high of $1.30190.

However, in response to the GDP Report, the GBP to USD struck a post-stat high of $1.30102 before easing back.

This morning, the GBP/USD was up 0.08% to $1.29980.

Up Next

Investors should monitor Bank of England chatter. However, no Monetary Policy Committee members are on the calendar to speak today, leaving commentary with the media to influence.

NIESR GDP estimates will also guide the GBP to USD ahead of the US session.

It is a busy day on the US economic calendar. US wholesale inflation figures for June and the weekly jobless claims will draw interest. A pickup in wholesale inflation and an unexpected fall in jobless claims could leave the markets to grapple with uncertainty toward a September move.

While the economic indicators will move the dial, investors should also track FOMC member chatter throughout the day.