The FTSE 100’s UK banks and housebuilders were among the top risers on Wednesday morning despite the UK economy contracting faster than expected in July.
UK GDP contracted 0.5% in July, more than the 0.2% consensus of economist estimates. The dismal reading has been blamed on the timing of the coronation, poor weather and a slowdown in construction.
Regardless of the reasons behind the drop, a 0.5% contraction should be a cause for concern.
“Today’s GDP data reflects a sluggishness surrounding the UK economy. While a technical recession remains at arm’s length, the challenging economic environment persists,” said John Glencross, CEO and Co-Founder of Calculus.
Nonetheless, the FTSE 100’s UK-focused housebuilders and banks rose on the news in early trade on Wednesday. A contracting UK economy is far from supportive of these companies’ earnings.
However, such a poor report of UK economic activity will have a major influence on the Bank of England’s next rate decision. Although wages are soaring according to data released yesterday, slowing economic activity will help to slow inflation and provide the BoE with an opportunity to pause rate hikes.
Lower rates will please investors in homebuilders struggling in the face of higher mortgage rates. This will then feed through banks and their mortgage lending activity.
This is the upside scenario. The downside scenario is persistent contraction, recession, and an even worse housing market than we have already.