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UK on course to get out of recession as GDP rises in February

12 April 2024

The Bank of England may cut rates before the Fed.

By Jean-Baptiste Andrieux,

Reporter, Trustnet

UK GDP rose 0.1% in February thanks to improvement in the services and production sectors, according to data from the Office for National Statistics.

Although GDP growth last month slightly dipped compared to the 0.3% rise recorded in January – which was revied up from 0.2% in the latest reading – the UK is now on track to exit the technical recession it entered at the end of last year.

Stephen Payne, portfolio manager on the global equity income team at Janus Henderson, said: “Industrial production was stronger than expected, continuing its recent pick-up, whilst construction activity was hampered by the very wet weather.

“Growth for the first quarter is now set to come in stronger than the Bank of England’s anaemic forecast, but it is still only a modest recovery that does not threaten the on-going disinflation in the economy.”

As a result, Payne believes that the stage is set for the Bank of England (BOE) to start cutting rates, as base rates remain “comfortably” above the rate of nominal GDP growth.

As such, the UK appears to be in a better position than the US to start its interest rate cut cycle, as inflation across the pond came in higher than expected earlier this week, dampening hopes for rate cuts in June, while more bearish market participants wrote off any rate cut in the US in 2024.

Meanwhile, the European Central Bank (ECB) opted to maintain its rates unchanged yesterday, with President Christine Lagarde confirming the ongoing disinflationary process. Therefore, the ECB may consider rate cuts at its next meeting in June should inflation persist in its downward trajectory.

Neil Birrell, chief investment officer at Premier Miton Investors, said: “With inflation tracking back, the BoE might be persuaded to start cutting rates sooner rather than later and after the CPI data out of the US and the ECB meeting over the last week, we could well see the Fed being the last of the three to take any action on rates. That would be quite a shift over a period of a few months.”

However, Danni Hewson, head of financial analysis at AJ Bell, warned that there are a few “wildcards” in play that could impact the UK economy in the coming months. That includes tensions in the middle east, which have recently pushed the price of oil over $90 a barrel, and the fact UK shoppers will have a few more pennies thanks to the cut in National Insurance contributions and the rise in the National Living Wage.

Ed Monk, associate director at Fidelity International, also sees a contradiction in having a recovering economy and the relief of lower rates at the same time.

He explained: “If today’s reading is positive for growth overall it may end up being bad news for both borrowers and financial markets, in the short-term at least. Both are waiting for the Bank of England to cut rates but wage rises and now better performance in parts of the economy are adding to inflationary pressures.

“Expectations of rate cuts this year have softened and markets now expect only two cuts before 2025.”

Nonetheless, both the FTSE 100 and FTSE 250 were up at the market open, as the positive GDP figure gave investors hopes that the UK is on its way out of recession.

Russ Mould, investment director at AJ Bell, said: “Housebuilders and supermarkets were in demand as investors took the view that a stronger economy will give a boost to consumer confidence and provide a better backdrop for spending.

“Miners also helped to give the FTSE 100 a lift as copper prices continued to climb thanks to the twin engines of supply fears and brighter demand prospects.”

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