After their last meeting, the BOE warned that 5 quarters of negative growth were coming. The consensus of expectations shows that there could be starting with data reports from tomorrow. There is an avalanche of data before the market opens, as is customary for the UK, but naturally GDP is likely to be the main focus, particularly given the context.
The battle for leadership of the Tory party also continues, with whomever winning the vote in September becoming Prime Minister. The leader in the race so far, Liz Truss, has spoken repeatedly about intervening in the BOE to broaden its mandate. Many question whether this will hurt the bank’s credibility. More importantly, a change in the mandate in the middle of an inflationary spiral could make things more difficult. On the other hand, one of the measures that Truss is proposing includes offering a rate outlook forecast, similar to the Fed’s dot-plot matrix, which could help reassure markets.
It’s all about the trends
Since many attributes are slowing economic growth, tightening monetary policy to fight inflation, how the BOE could react will also factor into the market’s reaction to the data. If GDP is growing, then the BOE has more room to keep hiking. If GDP is starting to contract, then the presumption is that inflation will start to turn around, and the BOE will be less likely to tighten.
In this context, the BOE’s projection that inflation will peak at 13 sometime later in the year implies that policy will likely remain tight, even if there is a technical move to negative growth. Technical here usually means a couple of decimal points in the red, which, while not good, isn’t the same as a full-blown recession such as 2020 or 2008.
What to look out for
There are three bits of data coming out, with different levels of importance to the market. In general, the “faster” the data, the more the market cares about it. By “faster” that means the most recent, shortest interval. So, in order of importance, we will likely have June, quarterly and annual GDP change figures.
June monthly GDP is expected to show -1.3% growth compared to 0.5% prior. Monthly GDP is a lot more volatile thus it’s easier to dismiss a large move. But for markets already sensitive to bad news, this could be interpreted as an acceleration to the downside in the near term.
The other market moving points
Quarterly GDP is likely to get the most attention, as it’s expected to show -0.2% growth, compared to +0.8% in the prior quarter. If the forecast is met, that could be the first of negative growth of two needed to technically talk about a recession. But it’s such a low margin, that a beat of just two decimals could have an important psychological impact on the markets as well. Annual GDP is projected to show 1.3% growth compared to 3.5% prior. While this on the surface appears to be a strong deceleration, this probably has more to do with comparables. Last year’s spring was much better for the economy than the winter, which is why there is a bigger difference between Q1 and Q2. It’s not as indicative of the move over the first half of this year, as of what happened last year.