Will the UK Avoid A Technical Recession?

Despite the dour outlook from the BOE and the Treasury, the UK is barely expected to avoid negative growth in the last quarter and, therefore, a technical recession.

Q4 GDP Expected to be Positive

The economic news has been mainly around the record number of strikes, which have been plaguing policymakers. Although expected in the middle of high inflation, it poses an extra challenge for officials trying to avoid a wage-price spiral. A few months ago, the government acknowledged that the country was already heading into a recession, and economic indicators have been anaemic.

In the third quarter of last year, the UK recorded negative growth, so if the fourth quarter were also negative, it would confirm that the economy has technically met one definition of a recession. However, the consensus of forecasts is that the UK will post growth of 0.1% in the fourth quarter and narrowly avoid a recession. This is despite annualised GDP growth forecast to fall precipitously to just 0.2%.

Bad News May be Good News for FTSE

At the same time, the UK is also expected to report manufacturing production, which is expected to drop -0.2% over a month and accelerate to -6.0% annually from -5.9% prior. Not exactly surprising in the context of multiple strikes in the transportation sector. But it does make the job of the BOE to deal with inflation a little more complicated, as higher rates would be expected to slow economic growth.

Better GDP figures would be expected to give more room to the BOE and support the pound. But a miss by just two decimals would confirm that the UK is in a technical recession and could lead to more speculation that the BOE won't hike as much. It might still be that bad news is good news, at least for the FTSE.

FTSE Continues to Hit Record Highs

Just yesterday, UK's FTSE hit a new record high of 7934, bringing the 8k handle closer to bulls. But the measured-move target of the flag pattern left behind is slightly higher than 8500. If 7700 holds firm and the 8k finally comes under bullish control, 8250 might be an interim ceiling. Inversely, losing the crucial support would expose 7300 and, in the longer term, the 7k threshold.

Key Takeaways

Despite the BOE and Treasury's outlook, the UK is expected to barely avoid a technical recession in the fourth quarter of 2023. The consensus forecast suggests that the UK will post growth of 0.1% in Q4, although annualised GDP growth is forecast to drop to 0.2%. Better GDP figures would give more room to the BOE and support the pound, but a miss by two decimals could lead to speculation that the BOE won't hike as much, supporting the FTSE instead.