Is the UK already in recession?

3 mins read

By Craig Erlam

Stock markets are recovering slightly on Wednesday after another volatile start to the week.

It’s clear that investors have one eye on the US this week, with Fed minutes Wednesday evening, US inflation data on Thursday and the start of earnings season likely to be the primary drivers into Friday’s close.

Any hope of a helping hand from the Fed minutes may not be forthcoming, with the commentary to an extent outdated at this point and policymakers seemingly unified in their goal of defeating inflation. Even a good CPI number on Thursday may do little to change that in the near-term.

Sterling jumps on BoE reports

The FT reported that the BoE could extend its emergency bond-buying measures beyond Friday in order to ensure continued stability in the market which has lifted the pound in early trade. While Governor Bailey’s warnings to pension funds this week gave the impression there’s no turning back, it would appear that isn’t entirely true.

And that shouldn’t be as surprising as it seemingly is.

While the hope within the central bank will be that its emergency measures have allowed pension funds to recalibrate and address the vulnerability in the bond market, if that doesn’t prove to be the case it would be ridiculous to pull the rug from under it, rather than extend the measures until the end of the month when we get the full budget.

Still, at a time when investors are living in fear of what’s around the corner, perhaps the mindset of “prepare for the worst and hope for the best” is behind it.

It does go to show how huge the Chancellor’s budget is in three weeks and the carnage that another misstep could cause. The BoE can buy the government time for now but it isn’t a permanent solution.

UK may already be in recession after GDP miss

The rebound in sterling held even as we received some pretty bleak GDP data for August, that suggests the UK may already be in recession. Most people already agree that the country is in recession but we’re just waiting for the data to technically confirm it.

The numbers weren’t good though, with a 1.6% manufacturing slump driving a 1.8% decline in production. Meanwhile, consumer-facing services fell sharply by 1.8%, with overall services dropping by 0.1%.

All in all, the numbers are pretty grim and I don’t see much scope for improvement in the near future, particularly on the consumer side. Perhaps the minor reaction is a reflection of the fact that most already believe the economy to be in recession and the data just confirms that, despite falling short of analyst expectations.

BoK end game in sight

The Bank of Korea hiked interest rates by 50 basis points overnight, taking the Base Rate to 3% and not far below what it believes to be the terminal rate of around 3.5%. The move was widely expected, with the central bank still concerned about external conditions and a weaker won.

Time will tell whether the central bank will indeed start to ease off the brake but Wednesday’s comments suggest that, much like the RBA, the end game is now in sight.

Edging higher, but growth concerns remain

Oil prices are nudging higher after paring recent gains so far this week.

There are two dominant forces in the oil market at the moment; the economic outlook being the primary downside risk and OPEC+ the upside. The latter reasserted itself last week with the 2 million barrel per day cut (much less in reality, of course), but growth fears are still dominating in the markets which may stop the price from taking off.

We could also see further coordinated action from consuming countries on the SPR after a frustrated response – to put it mildly – to the alliance’s output cut.

Gold paring losses but optimism running thin

Gold is edging higher amid a slight softening in the dollar and marginally lower yields.

I’m not sure anyone is getting too excited by Wednesday’s rebound, but coming after a week of declines, we may just be seeing some profit-taking ahead of the Fed minutes and inflation data. They will be the core focus for gold traders over the next 36 hours and given the response in the markets over the last week, they don’t appear overly optimistic.

Bitcoin remains in consolidation

Bitcoin is seeing small gains on Wednesday, with the cryptocurrency up less than 1% and still holding above $19,000. While the overall trend in recent days has been lower, the moves have been relatively mild and look more consolidatory than anything more worrying.

The longer trend of consolidation around $20,000 remains intact which is the most important thing. Whether that will be the case at the end of the week, much like elsewhere, will depend on the Fed minutes and inflation data.


Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.