UK Economy Expands by 0.7% in Q1 2024, with Services a Highlight

The UK Economy Expands by More than Expected

On Friday (June 28), the UK economy was in the spotlight after the recent Bank of England monetary policy decision to leave interest rates unchanged. Finalized GDP numbers for Q1 revealed a more resilient than expected UK economy.

The UK economy grew by 0.7% quarter-on-quarter in Q1 2024, up from a preliminary 0.6%.

According to the Office for National Statistics,

• Services sector output rose by 0.8% quarter-on-quarter, up from a preliminary 0.7%. Output across the services sector increased for the first time since Q1 2023.
• Household consumption rose by 0.4%, up from a preliminary increase of 0.2%.
• Production increased by 0.6%, down from a preliminary 0.8%. Manufacturing production was the largest contributor.
• The construction sector contracted by 0.6%, an improvement from a preliminary contraction of 0.9%.
• Real households’ disposable income increased by 0.7%, unchanged from Q4 2023.
• However, the household saving ratio increased from 10.2% (Q4 2023) to 11.1% (Q1 2024).

The UK economy had contracted in the previous two quarters and stalled in April 2024.

Bank of England Monetary Policy Implications

The Bank of England maintained interest rates at 5.25% on Thursday (June 20) in a 7-2 vote.

Concerns about inflation left the BoE in a holding pattern. Wage growth and services inflation trends influenced the BoE rate path. The finalized GDP Report highlighted the effects of the services sector on the UK economy and inflation. However, a higher savings rate and steady disposable income could give the BoE hope for a softer inflation outlook.

GBP/USD Reaction to the Finalized UK Q4 GDP Report

Before the UK GDP Report, the GBP/USD climbed to a high of $1.26467 before falling to a low of $1.26216.

However, in response to the Report, the GBP/USD fell to a low of $1.26302 before rising to a high of $1.26355.

On Friday, June 28, the GBP/USD was down 0.03% to $1.26353.

Up Next

Later in the session on Friday, crucial US inflation numbers could signal a September Fed rate cut. Economists forecast the Core PCE Price Index to rise 2.6% year-on-year in May after an increase of 2.8% in April.

Softer-than-expected numbers could fuel investor bets on a September Fed rate cut.

However, investors should also consider personal income and spending trends. Upward trends in income and spending may fuel demand-driven inflation and leave the Fed in a holding pattern for longer.

With inflation in the spotlight, investors should monitor FOMC Member commentary. FOMC Members Thomas Barkin and Michelle Bowman are on the calendar to speak. Reactions to the inflation figures and views on the timing of a Fed rate cut warrant investor attention.