- The UK economy went into recession, contracting by 0.3% in Q4, following a 0.1% decline in Q3,
- It hits the definition of two back-to-back quarters of negative growth.
- Bad weather, strikes and consumer caution were contributory factors.
- The FTSE 100 has shrugged off Britain’s economic woes buoyed by fresh Wall Street optimism.
- US stocks gain ground despite warnings a soft landing for the economy may prove elusive.
- Brent Crude dips, trading around $81 a barrel, as US crude stocks pile higher.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’The FTSE 100 has shrugged off Britain’s recession woes with fresh optimism from Wall Street rippling through markets. Investors are looking forward, with a slightly better scenario expected to emerge for the UK later this year. There are also hopes that earlier interest rate cuts are still in sight in the US following comments from one Fed policymaker.
UK enters mild recession.
Given the monetary screws have been turned so tight, at a time when inflation has battered many people’s finances, it’s not surprising that consumers recoiled from spending, helping push the UK economy into recession. In December shoppers refrained from festive excesses, pulled purse strings tighter while strikes by junior doctors knocked health output. Activity on construction sites also fell back by 0.5% with downpours likely to be partly to blame. Although some of these may be temporary effects, and the recession is still a mild one, the contraction in the fourth quarter was worse than expected. It seems clear that national resilience in the face of higher interest rates and painful borrowing costs has finally buckled. Even though the official recession recognition was expected, confirmation has pushed down the pound slightly, as pessimism about the UK’s prospects spreads. Sterling was trading at $1.255, dipping 0.12%.
There are a few green shoots of hope emerging this year, with business and consumer confidence increasing in January, but it’s going to be a hard slog back to meaningful expansion. This is a tough backdrop for the Conservative party to fight two by-elections, when household finances and the UK’ economic health is so high up the agenda for voters. It does raise hopes slightly though that the Bank of England will begin cutting rates from the middle of the year.
Wall Street shrugs off hard landing concerns
In the US Wall Street has been shrugging off the latest warning that the economy may smack into a recession if high interest rates linger. Fed policymaker Michael Barr said the 2% inflation target was still in reach, but it will be a bumpy road getting there and that a soft landing is not guaranteed. The Fed is hoping inflation will be tamed without a big spike in unemployment. But given that inflation is still so unruly, it’s going to take more time to tame.
For now, investors appear to have taken heart from comments from Chicago Fed Chair, Austan Goolsbee, who said he’d advocate cutting rates even before inflation hits the 2% target and that policy should be tied to confidence that the Fed was on the right path. His comments helped spark renewed optimism on Wall Street with stocks making strong gains. Positive sentiment is likely to continue but could wane again with investors set to be highly attuned to upcoming retail sales data and comments incoming from Federal Reserve Governor Christopher Waller.
Oil prices dip as US crude stocks rise.
Oil prices have dipped back as there is evidence of waning demand in the United States. Crude stocks piled higher than expected last week, surging by more than 12 million. However, with conflict in the Middle East still concentrating minds about potential supply issues, a floor is being kept under prices for now.
