UK Economy Contracted by 0.5% in July on Slide in Service Sector Output

Highlights

• The UK Economy contracted by 0.5% in July, with service sector output being a drag.
• In August, the UK Services PMI contracted, suggesting more trouble ahead.
• The GDP Report should close the door firmly on further BoE rate hikes.

UK Economy Contracts in July

This morning, the spotlight was on the UK GDP report. Recent UK economic indicators, such as retail sales and services sector PMI numbers, indicated a deteriorating macroeconomic environment.

The UK economy contracted by 0.5% in July versus 0.5% growth in June. Economists forecast the economy to contract by 0.2%. Significantly, the July GDP Report aligned with the BoE plans to leave interest rates unchanged.

According to the Office for National Statistics,

• All three main sectors reported contractions.
• Service sector output declined by 0.5%, the main contributor to the fall in the headline GDP number. In June, service sector output rose by just 0.2%.
• Consumer-facing services reported no growth in July versus growth of 0.5% in June.
• Manufacturing production slid by 0.8%, leaving industrial production down 0.7%.

Considering the July Labor Market Overview Report, an upward trend in unemployment would likely weigh more heavily on the service sector output. The UK services sector accounts for 80% of the UK economy, suggesting a deeper contraction in August. August service PMI numbers align with a more marked August contraction.

GBP to USD Reaction to the UK GDP Report

Before the UK GDP Report, the GBP to USD pair rose to a pre-stats high of $1.25024 before falling to a low of $1.24809.

However, in response to the GDP Report, the GBP/USD pair rose to a post-stat high of $1.24862 before sliding to a low of $1.24530.

This morning, the GBP/USD was down 0.23% to $1.24580.

Up Next

With the UK GDP Report closing the door further on BoE rate hikes, the focus will turn to the Fed. The US CPI Report will influence market sentiment toward Fed interest rate hikes.

Economists forecast the US annual inflation rate to accelerate from 3.2% to 3.6%. However, economists expect core inflation to soften from 4.7% to 4.3%. With the markets targeting core inflation to sway the Fed toward a hold on interest rates, the focus will remain on core inflation.

Higher-than-expected figures could reignite bets on a September Fed rate hike. This could also refuel fears of a US hard landing.