Sterling sank against the dollar on Wednesday as traders digested a dismal GDP reading for October that fueled speculation the Bank of England will be required to cut rates earlier than previously thought.
The UK economy contracted 0.3% in October as poor weather dented spending amid an already challenging environment for the UK’s consumer.
“Awful weather and the disruption caused by strikes won’t have helped, but even with the continued squeeze on consumer spending, the contraction in economic growth recorded in October was greater than had been expected,” said Danni Hewson, head of financial analysis at AJ Bell.
“All sectors of the economy were affected as the impact of two years of interest rate hikes work their way through the system. The big question is whether October is the harbinger of recession or a tipping point as wage growth finally surpasses inflation?”
Economists and market analysts have flip-flopped on calls for a UK recession over the past two years, with the economy dodging the most damaging effects of the cost of living crisis and rising interest rates.
It will take a brave forecaster to put their head above the parapet and call for a recession after so many have got it so wrong for so long.
That said, a 0.3% contraction is material, and the UK will need a bumper festive trading period to grow in the fourth quarter.
Importantly for markets, a UK recession, or projections of a recession, will play into central bank thinking and could bring forward the eventual date for the Bank of England’s first rate cut after the hiking cycle.
Slower wage growth released yesterday certainly supports the view that the UK is ready for borrowing cost to fall. However, timing the first cut is pure conjecture at this stage.
Susannah Streeter, head of money and markets, Hargreaves Lansdown, said: “it does increase the likelihood that the Bank of England might cut rates earlier than forecast, although it’s still not likely until the second half of next year, given that wage increases, although slowing, are still strong.”
The Bank of England will announce their last interest rate decision of 2023 tomorrow.