Footsie Could Slip Away From GDP Disappointment

The UK economy is expected to continue to underperform, but the benchmark stock index could avoid the turmoil - if the global economy stays positive.

Keeping Things Positive

The UK will release a barrage of data, with the trade balance and GDP figures likely to catch most of the trader's attention. After dipping -0.5% in July, UK GDP for August is expected to advance 0.1% and sustain a positive rolling three-month average that might suggest the UK could scrape by with barely positive growth in the third quarter. With the BOE looking to exit hiking along with its peers due to the weak economy, despite the still high inflation, resilience in the UK economy could continue to support the pound. But, with most of the FTSE 100's weighting coming from companies that primarily operate overseas, the benchmark could avoid much of the downside if the numbers disappoint.

Recently, the IMF raised its growth forecast for the UK in 2023 but cut it for next year. The UK is slated to have the second worst economic performance of the G-7, behind Germany. This could impact the trade balance, as the largest economy in Europe is a major trade partner for the UK. The slow economic performance of the Eurozone is likely to also weigh on the UK's growth outlook. The UK is expected to record a trade deficit of £14.2B, slightly increasing from the -£14.1B recorded in the prior month, as both the UK and Europe face higher costs that have weighed economic performance.

The Stock Effect

The IMF forecast contemplates the world's economy growing at 3.0%, with economists still hoping China will be a major growth driver. More directly, FTSE names such as HSBC would be expected to lead gains. But China is also expected to maintain demand for crude, which would help energy components of the FTSE, such as BP and Shell, to lead the index higher.

On the other hand, continuing disappointment in economic growth, particularly from China, could start to weigh on the UK blue-chip index. Recent PMIs have shown a slowing in the service sector in Europe, the UK's largest trade partner, where many major FTSE components have a significant portion of their operations, such as Unilever and Santander. Disappointment in the UK economic growth might simply be in line with worries over global growth and coincidentally weigh on the FTSE 100.

Footsie in Possible Wedge

Recent price action in Footsie has seen bulls putting a low in at 7220 for now, with the latest swing low at 7425 raising the chances of a triangle formation that requires a new high past 7810, let alone 7900 and the 8020 record. Conversely, losing the regional support could see the index back to the double-bottom area, where further clarity may be provided based on either a rejection and a bounce or additional pain under 7200.

Source: SpreadEx / UK 100

Key Takeaways

The UK economy is expected to underperform, but the FTSE 100 may not be heavily impacted if the global economy remains positive. The resilience of the UK economy and its trade balance with Germany and the Eurozone are potential factors to watch. The IMF forecasts global growth, driven by China, which could benefit certain FTSE-listed companies. However, continuing disappointment in global economic growth, particularly from China, could negatively impact the FTSE 100.