Category: Economy

LONDON — U.K. gross domestic product fell by 0.5% in July, below the 0.2% contraction forecast in a Reuters poll of economists.

Services output was the main drag, the Office for National Statistics said, declining 0.5%. The economy put in a better-than-expected performance for the second quarter as a whole, with the ONS reiterating its reading of 0.2% growth. July’s surprise dip meant the economy shrank at its fastest pace since December, according to ONS figures.

It is the latest sign of economic strain in the higher interest rate environment. On Tuesday, figures showed U.K. mortgages in arrears jumped to a seven-year high in the three months to June.

Major investment banks trimmed their U.K. growth expectations following the reading. Goldman Sachs revised its annual growth forecast to 0.3% from 0.5% and JP Morgan downgraded to 0.4% from 0.6%, Reuters reported.

However James Smith, developed markets economist at ING, said in a note that “cutting through the noise, the economy seems to be still growing, albeit fractionally.”

“We think the economy is likely to more or less flatline over coming quarters – and a mild recession can’t be ruled out,” he said.

Paul Dales, chief U.K. economist at Capital Economics, said the GDP figures may indicate a mild recession has already begun and “underlying growth has lost momentum since earlier in the year.”

Dales highlighted strikes and unusually wet weather as weighing on certain sectors, but said output declined more broadly, suggesting widespread weakness.

“Even so, with wage growth still uncomfortably strong, we suspect the Bank of England will still raise interest rates one final time next week, from 5.25% to 5.50%,” Dales said.

A potential concern for the central bank came Tuesday, when data showed annual growth in pay excluding bonuses remained steady at 7.8%, the highest on record. This was combined with a sign of slight cooling in the labor market, as unemployment rose 0.5 percentage points.

The British pound was 0.2% lower against the U.S. dollar at $1.245 at 8:40 a.m. London time Wednesday, as it also declined against the euro.

Jane Foley, head of FX strategy at Rabobank, said the BOE faced a “difficult predicament” given strong earnings data and slower U.K. growth.

“While the market is assuming that a September rate hike is a done deal, the uncertainty for following meetings is rising. Clearly too much tightening would risk a U.K. recession and this possibility appears a little stronger after today’s monthly GDP report,” she said via email.

“Weaker growth data thus increases the chances that Bank rate will reach its peak this month – an outlook which is weighing on the pound this morning.”

FRANKFURT — The European Central Bank is set to keep rates steady Thursday as economic activity in the euro area decelerates at a faster pace than previously expected. 

Shoppers in the region are holding back on spending as inflation eats up their disposable income, while the manufacturing sector has been in decline since around mid-2022. 

Economic theory would suggest that these two factors would drag inflation down. But whether this will prove to be the case is a still open debate inside the walls of the Frankfurt institution. 

“While doves will argue that it is just a question of time before weaker growth feeds into lower inflation, the hawks lean on part of the weakness in growth stemming from supply rather than demand,” said Paul Hollingsworth, chief economist with BNP Paribas, in a recent research note. 

“As a result, price pressures might be less sensitive to weaker growth than would typically be expected.”

Headline inflation for August was slightly higher than expected at 5.3%. But core inflation, which excludes energy and food and is closely watched by the ECB as a gauge of underlying price pressures, fell in line with expectations to 5.3% as well, down from 5.5% the month prior.

More information on what the ECB thinks about inflation and the growth trajectory will be revealed in a new round of staff projections on Thursday. The market expects revisions both to the ECB’s GDP and inflation outlook. 

“Given the recent data, the staff are likely to revise down the near-term outlook for growth,” said Deutsche Bank’s ECB watcher Mark Wall in a research note. 

“Tighter financial conditions and slower growth should translate into a lower level of core inflation by the end of the forecast horizon.” 

The outlook is still very uncertain. That’s what President Christine Lagarde stressed at Jackson Hole last month, the Federal Reserve’s annual conference. The past few years have seen numerous shocks which have caused lasting effects on the economic system and the transmission of monetary policy. 

“We have to form a view of the future and act in a forward-looking way,” Lagarde said in her speech at Jackson Hole. “But we will only ever truly understand the effects of our decisions after the fact,” she added.

JPMorgan Chase CEO Jamie Dimon said Monday that while the U.S. economy is doing well, it would be a “huge mistake” to believe that it will last for years.

Healthy consumer balance sheets and rising wages are supporting the economy for now, but there are risks ahead, said Dimon, who was speaking at a financial conference in New York. Topping his concerns include central banks reining in liquidity programs via “quantitative tightening,” the Ukraine war, and governments around the world “spending like drunken sailors,” the executive said.

“To say the consumer is strong today, meaning you are going to have a booming environment for years, is a huge mistake,” he said.

The world’s largest economy has defied expectations for a downturn for the past year, including from prognosticators like Dimon, head of the biggest U.S. bank by assets. Last year, he warned that a potential economic hurricane was on the way, citing the same concerns around central banks and the Ukraine conflict. But the U.S. economy has proven resilient, leading more economists to expect that a recession might be avoided.

While JPMorgan and other banks have been “over-earning” on lending for years because of historically low default rates, strains were emerging in parts of real estate and subprime auto lending, Dimon said.

“If and when you have a recession, which you’re eventually going to have, you’ll have a real normal credit cycle,” Dimon said. “In a normal credit cycle, something always does worse than” expected, he added.

Dimon struck a note of caution throughout the panel discussion. JPMorgan is repurchasing stock at a lower level than before, a pace which might last through 2024, he said.

“I think the uncertainties out there ahead of us are still very large, and very dangerous,” Dimon said.

Among those risks is the deterioration in relations with China, he said.

“I don’t expect war in Taiwan, but this can go south,” Dimon said.

This story is developing. Please check back for updates.