UK Economy Shrinks by 0.3% in Q4, Another BoE Headache

Highlights

• The UK economy contracted by 0.3% in Q4.
• The services sector output shrank by 0.2%.
• Later in the session, US retail sales, jobless claims, and Fed speeches warrant investor attention.

UK GDP

On Thursday, the UK economy was under the spotlight. Q4 GDP numbers drew investor interest.

In Q4, the UK economy contracted by 0.3% quarter-on-quarter after contracting by 0.1% in Q3. Economists forecast the UK economy to contract by 0.1%.

Year-over-year, the economy shrank by 0.2% after growing by 0.2% in Q2. Economists expected the economy to grow by 0.1% year-on-year.

According to the Office for National Statistics,

• Services (-0.2%), production (-1.0%), and construction (-1.3%) output impacted the UK economy in Q4.
• The services sector accounts for over 70% of the UK economy. In Q3, service sector output also shrank by 0.2%.
• In 2023, the UK economy grew by 0.1% after expanding by 4.3% in 2022. Growth in 2022 was the weakest since the 2009 global financial crisis, excluding the period impacted by the COVID-19 pandemic.
• Service sector and construction output grew by 0.3% and 2.0%, respectively, in 2023. However, production output fell by 0.3%.

Bank of England Monetary Policy Implications

The larger-than-expected contraction in the UK economy could raise question marks about Bank of England plans to keep a higher-for-longer interest rate path. Softer inflation numbers for January suggest a weaker demand environment. However, tighter-than-expected UK labor market conditions will likely remain a concern for the BoE.

GBP/USD Reaction to the UK Q4 GDP Report

Before the UK data, the GBP/USD fell to a low of $1.25557 before rising to a high of $1.25734.

However, in response to the UK GDP Report, the GBP/USD slid from $1.25671 to a low of $1.25472 before briefly revisiting the $1.25600 handle.

Up Next: US Jobless Claims, US Retail Sales, and Fed Chatter

On Thursday, US retail sales and jobless claims could influence investor bets on an H1 2024 Fed rate cut. Economists forecast US retail sales to decline by 0.1% in January. However, economists forecast initial jobless claims to increase from 218k to 220k in the week ending February 10.

Better-than-expected retail sales numbers could reduce bets on an H1 2024 Fed rate cut.

Beyond the numbers, investors must consider FOMC member commentary. FOMC member Christopher Waller is on the calendar to speak on Thursday. Reaction to the US inflation figures will warrant investor attention.

Other stats include the Philly Fed Manufacturing Index and NY Empire State Manufacturing Index numbers. However, these will likely play second fiddle to the US retail sales and labor market data.