UK to Avoid Recession, Will Jobs and GDP Support Narrative Ahead of BOE?

The UK is now forecast to avoid a recession this year, but now it's time for a trove of data ahead of the BOE's meeting next week.

The Good News

It has been a relatively positive week for UK Prime Minister Rishi Sunak. The UK and US governments announced enhanced economic ties, and the Confederation of British Industry upgraded its outlook for the UK, not only expecting that there will be no recession this year but also that business investment will increase. This was joined by KPMG, which also raised its outlook for the year, expecting similar growth. But, the accountancy firm also warned that the BOE was likely to hike another three times this year to get inflation under control.

In that context, tomorrow's employment data comes into renewed focus after BOE Governor Andrew Bailey was the first major central banker to warn that inflation had second-round effects. April average earnings are forecast to have grown 5.9% compared to the 5.8% reported previously, with the unemployment rate anticipated to remain steady at 3.9%, despite shedding jobs. The pace of job losses is expected to have moderated in May, with the claimant count expected to be more than half at 22K compared to 46.7K reported in April.

Enough to Support the Market?

The trove of economic figures continues on Wednesday, with April GDP expected to have grown at 0.2% compared to the -0.3% reported in March. But the international exposure of the FTSE 100 might keep the effects of UK growth data somewhat muted. Good news on the British Isles could be outpaced by the large weighting of petroleum companies such as BP and Shell affected by souring outlook for crude demand due to global economic underperformance.

While the outlook for the full year might be positive, in the short term, analysts seem to think there are still some bumps in the road. April manufacturing production is expected to remain flat for the month but fall 0.8% for the year. Moreover, Industrial production is expected to have slowed in April to 0.1% growth from 0.7% in March. The BOE is expected to keep its focus on lowering prices, with money markets pricing in as much as 100bps more tightening before reaching the terminal rate. While that might be good for sterling for now, it could keep the pressure on the FTSE 100 in the short term.

FTSE 100 to Form Triangle?

The recent price action off the record high at 8045 has printed lower highs and higher lows at 7940 and 7430 —- respectively. Typically, when prices embark on tightening action, they form either a triangle or some sideways consolidation, pending an imminent breakout.

An upward break past 7655 and 7800 might expose 7940 but must fail that top to increase the probability of the alleged triangle forming. Contrary, losing 7430 in a slide under 7545 might reveal further cracks towards 7200 if 7430 succumbs, with the invalidation only below the former-mentioned support.

Key Takeaways

The UK is expected to avoid a recession this year, with positive economic outlooks from the Confederation of British Industry and KPMG, but the Bank of England (BOE) may still increase interest rates three times this year to control inflation. Employment data due tomorrow is expected to show growth in April average earnings and a moderate pace of job losses in May. April GDP is also expected to show growth after contracting in March. Despite the positive outlook, analysts warn of short-term obstacles, including flat manufacturing production and slowing industrial production.