The UK’s preliminary GDP for Q2 increased by 0.3%, exceeding the expected 0.1% growth quarter-on-quarter. The previous quarter saw a growth of 0.7%, while annual GDP growth reached 1.2% compared to the anticipated 1.0%.
June’s strong performance across all sectors supported this economic growth, following slower activity in April and May. Despite this improvement, business investment fell by 4% from Q1, marking a notable decrease.
Bank Of England Flexibility
With today’s stronger-than-expected growth figures, the Bank of England gets more flexibility. We feel this makes an interest rate cut at the September meeting far less likely. The market was pricing in a significant chance of a cut, but this report allows the Bank to wait for more inflation data.
For interest rate traders, this suggests positioning for UK rates to remain higher for a little longer. The market has quickly reduced the odds of a September cut from nearly 50% down to around 20%. This might involve selling near-term SONIA futures, while still anticipating that cuts are coming towards the end of 2025.
However, the report contains a significant warning sign for the economy. The 4% quarterly drop in business investment is the most severe we have seen since the pandemic lockdowns in 2020. This indicates a deep lack of confidence in the business community about the future economic outlook.
Implications For The Pound Sterling
This underlying weakness should cap any strength in the Pound Sterling. The initial jump in GBP following the headline number could be seen as an opportunity to position for future downside. Over the coming weeks, the poor investment data will likely become the focus, creating a drag on the currency.
This mixed data suggests a tricky environment for the FTSE 100. Better growth is supportive, but the prospect of higher rates for longer and collapsing business investment creates headwinds for corporate profits. We expect this to keep stock market volatility relatively contained, favouring strategies that profit from range-bound price action.
Looking back at 2024, we saw a similar period where sticky inflation kept the Bank from cutting rates despite sluggish growth. That experience suggests the Bank will prioritise fighting inflation until it is firmly at target. Therefore, this GDP report reinforces the idea that they will not rush to lower borrowing costs.
