The pound strengthened after the release of better-than-expected UK GDP data for May on Thursday. The UK GDP rose 0.5% in the month to May according to the Office for National Statistics (ONS).

In the three months to May the economy grew 0.4% beating expectations, as economists predicted zero growth.

About UK GDP

The Gross Domestic Product released by the National Statistics measures the total value of all goods and services produced by the UK. The GDP is a broad measure of economic activity, and if it goes up, is seen as positive for the pound, and vice versa.  

All components of the UK economy contributed to the positive data, with manufacturing production increasing 2.3% in the month to May. Health services were a major driver of growth, with a large rise in GP appointments.

Industrial production grew 0.9% and construction output increased 4.8%. The services sector rose 0.1%, also beating expectations.

British finance minister Nadhim Zahawi commended on the stronger-than-expected UK GDP data and said: "It’s always great to see the economy growing but I’m not complacent. We’re working alongside the Bank of England to bear down on inflation and I am confident we can create a stronger economy for everyone across the UK."

UK economy outlook

May’s GDP data has not changed economists’ expectations for a contraction in the second quarter, as Gabriella Dickens, Senior U.K. Economist at Pantheon Macroeconomics warned.

Consumer confidence readings are also lower which confirms the services sector will experience further troubles ahead.

Dickens said: "Nonetheless, a recession—two consecutive quarters of negative growth—remains unlikely. Households’ real disposable incomes should rise in Q3, in response to the increase in the threshold for NI contributions and Cost of Living grants from the government."

While the UK economy rebounded in May after shrinking in April and March, businesses reported higher running costs. The increase in fuel and electricity costs forced businesses to raise their prices for customers.

Paul Dales, chief UK economist at Capital Economics, said that with household disposable incomes expected to fall further there was still a real risk that the economy could fall into a recession. In general, economists noted that despite the upbeat data, there was no significant indication that the momentum would change considerably.

Both businesses and households are having to deal with rising prices, and inflation is expected to reach 11% later this year.

Andrew Bailey, the governor of the Bank of England, has pledged to bring inflation down to its target of 2%.

The new chancellor Nadhim Zahawi, said that he knew people were concerned by rising prices and that the government was going to work closely with the BoE to curb inflation and strengthen the economy.

With the current volatility and concerns about an economic slowdown, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

The pound has recovered against the US dollar and is higher against the euro. The recovery is due to a weakness in the US dollar, after a positive shift in risk sentiment, with news of Shanghai reopening, which have weakened the safe-haven US dollar. Analysts have noted that any further boost to the GBP/USD might be unlikely, as US Treasury yields continue to rise.

Additionally, the difference between the Fed and BoE’s monetary policy will possibly keep the pound under pressure, at least in the near term.

In the coming week, traders will turn their focus on UK inflation data, while headlines regarding market sentiment and Brexit will also provide direction.

Gas supplies to Europe

The euro has fallen against the pound and the US dollar as rising gas prices could push the Eurozone economy into recession later in 2022 and deter the European Central Bank from raising interest rates. The currency market is expecting less interest rates now as stagflation fears have risen. Russia’s squeeze in gas supplies to Europe and a surge in European gas prices have added to concerns. Natural gas prices surged in Europe on Thursday after it was revealed that Russia was sanctioning energy companies. Russia listed 31 companies which are banned from conducting transactions and entering Russian ports. Gas transit to Europe via Ukraine has also been restricted.

The gas supply disruptions through Ukraine and then to Germany have pushed growth expectations lower.

With lower rate hike expectations, the euro has weakened and any boost it may get from a more positive ECB rhetoric could be short-lived. The pound rose as a result of the euro’s weakness.  

The realisation that inflation could lead to recession, and the fall of the euro follows the Bank of England’s recession warning and the fall of the pound last week.

Eurozone recession risks

Concerns about the Eurozone economy have been voiced by various CEOs who fear the worst. Bosch CEO Stefan Hartung said: “For sure, we see a big recession in the making, but that’s exactly what we see — it’s in the making. There is still an overhanging demand because of the Covid crisis we just are about to leave. It’s still there and you see it heavily hitting us in China, but you see that in a lot of areas in the world, the demand of consumers has already even been increased in some areas.”

Eurozone investor morale has dropped in Europe to its lowest level since June 2020 following the war in Ukraine. According to the latest Sentix index of investor confidence, the index fell to a near two-year low in May (-22.6). Investors were pessimistic about the current economic situation, and the economic outlook with recession becoming visible in the euro area.

Further euro weakness

Analysts warn that the euro could fall further if Russia restricts gas supplies which is something that is increasingly possible as the Russian army has failed to make any progress in eastern Ukraine.

This could lead Russia to attack the West by limiting European gas supplies which could affect Eurozone economy and the growth outlook, while hurting market sentiment towards the euro. The war in Ukraine has tied the euro to energy supplies. For most economists, the possibility of a recession in the Eurozone has risen and the euro will be sensitive to news and developments concerning the region’s growth and potential risks.

 

With the current volatility and weak market sentiment, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

 

The pound has fallen to a new two-year low against the US dollar, and a seven-month low against the euro, as uncertainty about the UK economy and recession concerns have increased.

UK GDP shrinks in March as consumers cut spending

According to the latest data from the Office for National Statistics (ONS) released on Thursday, Britain’s economy contracted in March as spending in shops dropped sharply due to the rising cost of living, including higher energy bills. Activity fell by 0.1% with spending in shops experiencing a significant drop.

The Chancellor, Rishi Sunak, said: “The UK economy recovered quickly from the worst of the pandemic and our growth in the first few months of the year was strong, faster than the US, Germany and Italy, but I know these are still anxious times. Our recovery is being disrupted by Putin’s barbaric invasion of Ukraine and other global challenges but we are continuing to help people where we can.”

The wholesale and retail trade sectors suffered the most, while the car sector also experienced falling sales. The fastest growth was seen in human health and social work activities.

Business Investment

UK business investment fell by 0.5% in the first quarter of 2022, as companies saved capital instead of spending spending on new projects.

Martin Beck, chief economic advisor to the EY ITEM Club, said: “With the consumers feeling the pinch and the Government tightening its purse strings, the onus is on companies to step up and invest more before the super deduction ends next year. But with business investment having fallen again in Q1 2022, the year has got off to a disappointing start in that respect.”

NIESR principal economist Rory Macqueen underlined the decline in consumer confidence which resulted in the drop in retail and wholesale. As he noted, “Falling business investment in the first estimate for the first quarter is a concern: with the government’s tax ‘super-deduction’ expiring in under a year we still still see little sign of a recovery from the Covid shock.”

Pound outlook

Economists have warned that the pound will remain weak, and today’s report adds to concerns about the economic outlook. With economic growth slowing, inflation continuing to rise, and Brexit looming in the background, the pound is expected to remain under pressure.

The UK’s political uncertainty and rising inflation will keep the pound vulnerable. Gerard Lyons, chief economic strategist at Netwealth warned that “At this rate a self-made sterling crisis could be next. Having wrongly eased aggressively when growth was recovering and inflation was rising last year, the Bank now continues to hike as it forecasts a sharp slowdown and likely recession ahead.”

A lower pound might attract tourists to the UK and make UK exports more competitive. On the other hand, any boost to the pound could prove be temporary.

With the current volatility and weak market sentiment, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.

In worrying times like this, it is important for us to point out that we completely acknowledge the wider implications of international conflict. Our principle duty as a company is to ensure that our clients are aware of all of the factors that affect currency exchange rates, which sadly sometimes includes war. Our thoughts are with everyone who is being affected by this escalating situation, and our currency updates do not intend to diminish, ignore or undermine the true impacts of this conflict.

The UK economy has grown faster than expected as the economic damage caused by the Omicron variant receded. Despite the positive news, the pound continued to slide lower, especially against the US dollar. Fears that the war in Ukraine will impact on UK growth and that inflation will rise further have pushed the pound lower. In the coming week, the Bank of England is expected to hike interest rates by a further 25 basis points. Investors will closely watch comments by the Bank’s policymakers when they deliver their decision as well as how each member voted which could affect the pound.

UK GDP

New figures on Friday released from the Office for National Statistics show that UK GDP grew by 0.8% in January, faster than economists expected, after contracting in December when ‘Plan B’ restrictions were introduced to fight the Covid-19 variant. According to the ONS, every sector grew in January, with services, production and construction up 0.8%, 0.7% and by 1.1%, respectively. As the ONS reported: “Output in consumer-facing services grew by 1.7% in the month, mainly driven by a 6.8% increase in food and beverage activities, while all other services also saw growth on the month, by 0.6%.”

ONS director of economic statistics Darren Morgan said: “All sectors grew in January with some industries that were hit particularly hard in December now performing well, including wholesaling, retailing, restaurants and takeaways. Computer programming and film and television production also had a good start to the year. While supply chain issues persisted in certain sectors, output in both construction and manufacturing grew for the third month running.”

Economic uncertainty due to Russia’s invasion of Ukraine

January’s recovery means the UK economy is now above its pre-pandemic levels, but the war in Ukraine poses a serious threat to recovery. Responding to today’s report, Chancellor of the Exchequer, Rishi Sunak, said: “We have provided unprecedented support throughout the pandemic, which has put our economy in a strong position to deal with current cost of living challenges. We are continuing to help people where we can, including through over £20bn of support this financial year and next. We know that Russia’s invasion of Ukraine is creating significant economic uncertainty and we will continue to monitor its impact on the UK, but it is vital that we stand with the people of Ukraine to uphold our shared values of freedom and democracy and ensure Putin fails.” The Chancellor is expected to provide much-needed support for UK households which are struggling with higher living costs. Economists have warned that the government’s package of a £200 energy bill rebate (repaid over five years) and a £150 council tax rebate for some households is not enough to alleviate the cost-of-living crisis.

What economists say about the GDP report today

Paul Dales of Capital Economics has said that the war in Ukraine and the cost-of-living squeeze will weigh on growth, despite January’s rebound. He said that from March and April households will begin to feel the blow due to higher energy prices and the war in Ukraine. Because of this, economic growth will slow down throughout the year.

KPMG UK chief economist Yael Selfin has also said that the conflict in Ukraine will hurt recovery: “Further headwinds for the UK economy are likely to arise from the elevated levels of uncertainty, tighter financial conditions, and disruptions to trade, potentially reducing GDP growth to 3.3% this year and to 0.8% next year.”

 

The sanctions and concerns about the supply of commodities, could revert some of the progress made by companies recently, as many UK firms have reported that supply chain issues have eased.

Russia – Ukraine conflict impacting on global economy

The sanctions on Russia have also affected the Russian economy which could enter into a deep recession.  In the global economy, the conflict has pushed commodity prices and inflation higher and hurt financial conditions and business confidence.

The ban on oil imports from Russia by the US and UK along with the widespread sanctions will be followed by more economic pressure on Russia by the US. According to reports from Reuters and Bloomberg, US president Joe Biden is expected to call later today for the end of normal trade relations with Russia, which will allow for increased tariffs on Russian imports.

GBP/USD recovered some of its earlier losses as investors tried to assess the latest data releases from the UK. The pound’s reaction to the UK data was muted. The ONS reported that the UK GDP grew by 1% in Q4, compared to the market expectation of 1.1%, and Industrial Production expanded by 0.4% on a yearly basis. The larger than estimated traded deficit did not impress markets and did not provide any momentum to the GBP/USD pair.

The pound’s recovery was the result of a weaker US dollar as retreating US Treasury bond yields stopped any gains for the greenback and helped the pound rise. Market participants now look forward to the US release of the Preliminary University of Michigan US Consumer Sentiment Index. The release, along with market sentiment and US bond yields will be the main drivers for the GBP/USD currency pair.  

UK GDP report

Despite the disruption caused by the Omicron variant in December, the UK economy continued to grow in the final quarter of 2021. The UK GDP report published by the UK's Office for National Statistics (ONS) revealed that the UK economy grew by 1% on a quarterly basis in the fourth quarter. This reading came in slightly lower than the market expectation of 1.1% but failed to trigger a market reaction.

The ONS said: “The largest contributors to this quarterly increase were from human health and social work activities driven by increased GP visits at the start of the quarter, and a large increase in coronavirus (COVID-19) testing and tracing activities and the extension of the vaccination programme.”

Darren Morgan, director of Economic Statistics at the ONS, said GDP fell back slightly in December but “grew robustly across the fourth quarter as a whole with the NHS (National Health Service), couriers and employment agencies all helping to support the economy.”

UK posts the fastest growth in the G7 in 2021

The UK economy grew 7.5% in 2021, the fastest since the 1940s, after it recovered from the pandemic. It is the fastest growth since the second world war, despite the disruption caused by Omicron in December. It is ahead of the US (5.7% growth), France (+7%), Germany (+2.7%), and Italy (+6.5%) as well as the EU (+5.2%), and possibly Canada and Japan who have not released their 2021 GDP data. But, the UK is recovering from a lower base, since its economy contracted 9.4% in 2020, much lower than other G7 members.

A resilient economy

Chancellor of the Exchequer, Rishi Sunak praised the government’s support for helping the economy say strong and grow. He said: “Thanks to our £400bn package of support and making the right calls at the right time, the economy has been remarkably resilient; with the UK seeing the fastest growth in the G7 last year and GDP remaining at pre-pandemic levels in December. I’m proud of the resolve the whole country has demonstrated, and proud of our incredible vaccine programme which has allowed the economy to stay open. We’re continuing to help the economy rebuild through our Plan for Jobs, boost for business investment and support for households with the cost of living.”

 

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The pound was resilient against the US dollar and has risen to two-month highs. Last week it hit a 22-month high against the euro as the potential for more hikes by the Bank of England (BoE) offered support. Omicron concerns have eaten away at some of the pound’s gains against the euro.

The prospect of a BoE interest rate hike at the Bank’s February meeting has helped boost market expectations.

UK Prime Minister looking to reduce quarantine period

British Prime Minister Boris Johnson said on Monday that the government is considering the prospect of reducing the quarantine period from seven to five days. Since Britain was making progress against the variant, the government will look at reducing the days of isolation, but it warned that the number of hospitalised people was rising. The Prime Minister explained that "We've got to make sure that we see off Omicron. We're making great progress. (But) the 18,000 people with COVID currently in hospital... that's massively up, and the numbers are increasing.”

His comments did not have a noticeable impact on the pound.

UK companies remain optimistic

The latest survey from accountancy company Deloitte has showed that 37% of chief financial officers are planning to boost investment in 2022 and focus on growth despite Omicron concerns. Companies expect conditions and productivity to improve but persistent labour shortages remain a considerable risk. A high number of companies believe that trade conditions have been affected by Brexit.         

Brexit concerns

Manufacturers have warned that Brexit will exacerbate costs amid concerns of persistent challenges relating to customs delays and red tape. Make UK, which represents 20,000 manufacturing firms across the UK has said that Brexit remains a central concern. In its 2022 Make UK/PwC senior executive survey of 228 firms, businesses have warned of damage from Brexit disruption which has been further complicated by the pandemic and rising costs.

GBP/EUR hits a 22-month high

Last week’s positive market sentiment favoured risk sensitive currencies such as the pound and pushed the euro lower. The euro was also lower due to the significant differences in policies by the UK and European central banks. Eurozone data did not help offer any support.

The pound rose further following the UK government’s decision not to introduce more Covid restrictions while BoE rate hike expectations boosted Sterling. Traders have now priced in an 82.5% chance of another interest rate rise at the bank’s meeting in February.

However, the rising number of Covid cases puts further pressure on the pound which has failed to sustain its 22-month high.

Week ahead: What to expect

Omicron will continue to impact on the British currency. If Covid cases continue to fall, then the pound will strengthen and vice versa.  

On Friday, we get the latest GDP data, which is expected to have grown 0.4% in November and may help offer support to the pound.

Want to book your ideal rate? If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Universal Partners FX and their dedicated team can offer valuable insights into the market ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help, efficient risk management and tailored solutions to your business’ transfer needs.

The UK economy has shrunk sharply in the first quarter of 2020, according to the Office for National Statistics (ONS). Sterling fell initially, but then stabilised after the British government extended its furlough scheme until the end of October.

GDP

GDP fell 2.0% fall in the three months to March after there was no growth in the three months to February. Particularly, March was a terrible month for the economy, as the GDP dropped by 5.8%, marking the worst performance since the ONS started calculating monthly data back in 1997.

While the UK economy before the Covid-19 lockdown was not faring well, contracting by 0.2% in February, as the coronavirus pandemic started, in March, however, it suffered dramatically. The drop in the first three months is considered to be the biggest quarterly drop in activity since 2008 after the collapse of the Lehman Brothers and the beginning of the global financial crisis.

Yesterday, chancellor Rishi Sunak warned that the UK recession was “already happening”, and that things will not improve in the near future. Last week, the Bank of England forecast that the UK economy might contract by 25% in the April-June quarter, which could be the deepest recession in three centuries.

Decline in Services, Manufacturing and Construction

The ONS reported that in March, with the beginning of the lockdown, the GDP contracted by 5.8% with the services sector shrinking by 6.2% during March, manufacturing output dropping by 4.6% during the month and construction contracting by 5.9%.

The Office for National Statistics explains that there is a close connection between the lockdown measures and the drop in economic activity:

In response to the coronavirus (COVID-19) pandemic, public health restrictions and social distancing measures have been put in place in the UK, leading to a widespread disruption to economic activity. These measures have impacted upon the spending behaviours of consumers as well as how businesses and their employees operate. It has also affected the provision of services provided by government, including health and education.

Services output decreased by 1.9% in Quarter 1 (January to March) 2020, the largest quarterly fall since records began. Production output fell by 2.1% in Quarter 1 2020, driven by declines in manufacturing. Construction output decreased by 2.6% in the first quarter.

According to Jonathan Athow, deputy national statistician for economic statistics, in March, the coronavirus pandemic hit the economy hard, with certain industries such as services and construction declining sharply and others, such as IT support and pharmaceuticals seeing growth.

Key points from the release:

The release reflects the dire effects of the coronavirus pandemic and the economic disruption to various sectors. March was the worst month as education fell by 4.0% due to school closures, wholesale and retail trade and repair of motor vehicles and motorcycles by 10.7%, food and beverage service activities by 7.3% and accommodation by 14.6%. The travelling sector was also hit falling by 23.6% while transport equipment-making declined by 20.5%.

What economists say:

Talking on Sky News, Sunak said that the government was positive and could “emerge stronger” on the other side. He said: “In common with pretty much every other economy around the world we’re facing severe impact from the coronavirus. You’re seeing that in the numbers. That’s why we’ve taken the unprecedented action that we have to support people’s jobs, their incomes and livelihoods at this time, and support businesses, so we can get through this period of severe disruption and emerge stronger on the other side.”

However, Tej Parikh, chief economist at the Institute of Directors, fears that Britain will not “emerge stronger” from the lockdown as he believes that UK firms will remain under pressure:

While countless companies have made adjustments with admirable speed, many will find it difficult to operate at anything like normal capacity under social distancing rules. The furlough scheme has undoubtedly staved off redundancies, and the new flexibility provides businesses a better chance of rebooting.

The Treasury will need to continue innovating to kickstart any recovery. The Government’s loan scheme provided ready cash, but now leaves many firms saddled with debt. Unless this is managed well, it will drag on business investment for long after the lockdown ends.

If you are sending money abroad and are worried about the pound’s volatility due to the current market conditions, please get in touch with Universal Partners FX. UPFX’s dedicated foreign exchange specialists can help you access the most competitive exchange rates and make your currency transfers stress-free.