UK returns to growth in September as CPI beats expectations

It's been a long slow recovery from the pandemic for many of the world's economies, with Europe particularly hard hit. It's just been one thing after another for the old continent, from runaway inflation that was especially difficult for the ECB to treat on account of an extremely rate-sensitive credit market and heightened energy insecurity amid ever-worsening political instability on its borders. However, perhaps the worst case of economic long COVID was noted in the United Kingdom. Post-Brexit Britain had to deal with many of the same difficulties as its EU27 neighbours but in isolation and with the added burden of reduced business with what was previously one of its biggest trading partners. And just as things started to look up with the UK recording modest but solid growth every month of 2024, two months of stagnation had analysts throwing around the "R" word.

But now the latest numbers from the Office of National Statistics showed a 0.2% increase in August, indicating that the UK's good economic run is far from over. The good news only increased with a CPI report that showed year-over-year inflation at 1.7%, a three-year low. This comes just ahead of the Labour government's autumn budget announcement by Finance Minister Rachel Reeves, from which the Bank of England and the British economy will take their lead in the final quarter of 2024. But what does this mean for sterling and UK indices, and what will be the key factors deciding their trajectories into 2025?

Pound for pound

Immediately following the news last Friday (11 October), the Cable rose a solid 0.05%. These gains were fairly short-lived, however, and GDP/USD was back at its multi-month average of 1.30. In fact, spot prices are currently (16/10) around 1.3070-1.3075 and have barely moved all week. At the same time, UK government bond yields dipped lower, with the 10-year trading around 4.211% after sharp increases over the preceding days. Now, as odd as this might seem given the strength demonstrated by the recent GDP numbers and relatively high interest rates of 5%, the bulls are reluctant to go all in on sterling, even more so following the September CPI reading of 1.7%, which is well below the BoE's 2% target.

This, of course, makes the likelihood of a rate cut on 7 November even greater, particularly in light of the 50 bps cut already implemented by the US Federal Reserve across the pond. Naturally, the effect on sterling of a similar move by the UK regulator will surely be to depress its value against the other majors. This does not take into account a further cut by the Fed to its own funds rate, of course, the likelihood of which the CME's FedWatch tool currently estimates at over 90%. In this context, we should expect GBP/USD to remain trading in its established range of 1.30–1.33, with the potential for a dip below its 1.30 resistance in the event of a larger cut by the BoE or none by the Fed.

Good for business

While the positive macroeconomic data might well be neutral to negative for the pound and gilts, it will certainly come as a welcome gift to the country's business sector. The low inflation and interest-rate environment, in combination with a favourable labour market situation, should increase consumer spending and create a positive feedback loop that boosts UK indices and individual stocks. The FTSE 100 is already up over 3% since August, and these gains are only likely to accelerate once interest rates come down and households have more disposable income to spend after mortgage payments have been made.

Obviously, the autumn budget will also have a determining role in the performance of the UK equities market, with duty increases expected for alcohol liable to impact the hospitality and beverage sectors. However, perhaps the most worrying aspect of the Labour budget proposal as far as businesses are concerned will be the suggestion to increase employer National Insurance contributions on both salaries and pensions as a way of filling the "22 billion black hole" left in the country's finances by the outgoing Conservative government. This will increase payroll costs significantly and could offset any gains from lower rates. With the traditionally favourable Santa Claus Rally from November to December, the full picture won't be clear until January 2025 at the earliest.

Trade CFDs on UK stocks and more with Libertex

Libertex's CFD portfolio of underlying assets includes everything from metals, crypto, and forex through to stocks, indices and ETFs. Trade a wide range of CFDs in underlying assets, such as the FTSE 100, iShares MSCI United Kingdom, GBP/USD, and EUR/USD. For more information about what we can offer you or to create an account of your own, visit www.libertex.com/signup today.