UK Economy Provides Relief with 0.2% Q2 Growth, according to GDP Report

Key points:

• In Q2, the UK economy saw a growth of 0.2%, driven by an increase in production and contributions from consumer-facing services, providing some relief.
• However, despite the positive growth, economic indicators suggest a decline in the UK economy in the third quarter.  

UK GDP

The UK GDP report attracted investor attention this morning, and any downward revisions to the numbers could enhance concerns about a severe and prolonged economic recession in the UK.

The UK economy experienced a 0.2% growth in the second quarter, aligning with the initial estimate of 0.2%. In the first quarter, the economy expanded by 0.3%. On a year-over-year basis, the economy saw a growth of 0.6%, surpassing the preliminary estimates of 0.4% and the 0.2% growth in the first quarter.

According to the Office for National Statistics:

• The increase in production by 1.2% contributed to the overall economic activity.
• However, the household saving ratio witnessed a significant jump of 9.1% in comparison to a 7.1% increase in the first quarter. The rise in salaries and wages, along with social benefits, supported this upward trend.
• Consequently, household disposable incomes increased by 1.2% after remaining stagnant in the previous quarter.
• The UK GDP in the second quarter is 1.8% higher than the pre-COVID-19 pandemic levels.
• While the production sector played a role in the growth, the services sector did not exhibit any growth in the second quarter.
• Consumer-facing services, however, grew by 0.9%.
• Household consumption experienced a 0.5% increase, which is lower than the 0.7% growth seen in the first quarter.

The second quarter GDP figures are likely to bring some relief. However, recent economic indicators in the UK suggest a more significant deterioration in the economy than previously anticipated.

Given the negative economic outlook, the Bank of England may adopt a wait-and-see approach. Specifically, members of the Monetary Policy Committee are likely to gauge the effects of previous rate hikes on the economy before making any further decisions.  

GBP/USD Reacts to UK GDP Report  

Prior to the release of the UK GDP report, the GBP/USD declined to a low of $1.21933 and then climbed to a pre-report high of 1.22283.

Following the release of the UK GDP report, the GBP/USD initially dropped to a post-report low of $1.22197 before rebounding to a high of $1.22364.

As of this morning, the GBP/USD showed a 0.31% increase, reaching $1.22353.  

Coming Up: US Personal Income and Overlays  

Later today, the US inflation and personal spending data are expected to have an impact on investor sentiment regarding the Federal Reserve's future interest rate decisions.

If the Core PCE Price Index and personal spending figures come in lower than expected, it could reduce expectations for further rate hikes by the Federal Reserve. However, if personal income shows an upward swing, it could indicate a positive outlook on consumer spending.

Economists are predicting that the Core PCE Price Index for August will increase by 3.9% year-over-year, compared to 4.2% in July.

Additionally, economists are forecasting a 0.4% increase in personal spending (compared to a 0.8% increase in July) and a 0.4% rise in personal income (compared to a 0.2% increase in July).