Pound shrugs off weak GDP data for now

UK GDP disappoints

The UK economy barely registered any growth in Q3, rising a mere 0.1% QoQ. This is a sharp slowdown from the 0.5% increase in Q2. Growth faded during the quarter, and September GDP fell by 0.1% on the month, led by a subdued services sector. The engine of the UK economy, services, rose by a mere 0.1% last quarter, while construction jumped by 0.8%. However, the main culprit was manufacturing, and there were declines across most manufacturing sub sectors in the three months to September.

Disinflation process continues

This will not be comfortable reading for the Labour government, GDP per capita fell by 0.1% last quarter, and is flat compared to a year ago.  However, some of the weakness could be down to low confidence before the Budget. Now that the Budget is out of the way, growth could pick up in the last quarter of the year. There was some good news within the report: the GDP implied deflator eased further last quarter to 2.4%, compared with a year ago. This suggests that the disinflation process is continuing in the UK, which supports further BOE rate cuts.

Trade data also weighed on growth. The UK’s trade deficit was wider than expected in September. For Q3 there were declines in both imports and exports, which also weighed on the Q3 GDP figure.

Labour can’t be blamed for Q3 weakness, but they need to work fast to stem the decline

There was some good news, the report showed a rise in private consumption, and strong fixed capital formation, or investment. Total business investment was also strong, rising at a 1.2% quarterly rate. This could help to trigger growth down the line. However, at first glance, this GDP report supports the view of both the OBR and the BOE that the UK economy is a high spending, low growth economy as we move towards the end of 2024.  

It is hard to blame Labour policies for this data, the economy has undoubtedly weakened since they took power, however, the real impact of the Labour government could take some months to feed through to the real economy.

Pound benefits from a weaker dollar

The pound is higher on Friday; however, this is due to a general move lower in the dollar and does not appear to be linked to the GDP report. If the dollar continues its decline, then we could see a return to the $1.27 handle in GBP/USD. The market is not expecting the BOE to cut rates next week, with only a 15% chance of a cut. Rates are likely to stay higher in the UK relative to Europe, however, if growth does not pick up in the coming months, then that narrative could start to shift. The dollar is falling, even though Fed chair Jerome Powell’s speech last night was hawkish and suggests that the Fed could slow down their pace of rate cuts. The decline in the dollar, could be a ‘buy the rumour, sell the fact’ scenario, or it may be a sign that traders are taking profit after a strong week for the greenback, the dollar index reached a near two-year high.

Headwinds ahead for the UK

The risk for the UK economy is that the Q3 data does not take account of the UK Budget, and the hike to employers’ national insurance, which won’t take effect until next year. The Budget has been criticized for being anti-business, which could threaten the Labour government’s professed desire to boost growth. Added to this, Trump hasn’t taken office in the US yet, and we don’t know what his tariff plan will look like, or how his relationship with the UK will evolve. Thus, there are still plenty of headwinds that could hold back UK GDP in future.

In the short term, Rachel Reeves and co. should focus on boosting GDP per capita, as right now, the population continues to grow, immigration surged in 2023, yet that is not having an impact on our GDP, which is deeply concerning.