Today’s ONS update, revealing a bounce in UK output during May and some upward revisions to previous months, still does not negate the risk of a negative Q2 GDP print. Recent UK economic data, primarily driven by the unstable political landscape, have been very poor, as PMIs and retail sales undershot expectations. Globally, manufacturing weakness has led to a broad GDP slump, and the UK is no exception.
Central bankers have had a new challenge over the past year due to the changing geopolitical environment (trade wars, Brexit) and with it, uncertain outcomes that could significantly impact on economic fundamentals. The Bank of England (BoE) has chosen not be drawn into second guessing these events, and by sticking to its traditional metrics, has been at odds with the market and most of the central banking community. BoE Governor Mark Carney did come close to backing a pre-emptive “insurance” rate cut in a recent speech, but maintained that globally everyone was too negative, basing their views on events whose outcomes are ultimately too unpredictable.
The core thinking at the BoE is that the UK output gap has largely closed, with unemployment low, wages rising and immigration from Europe in decline. This has been at odds with global trade developments and domestic Brexit fears that have pulled business survey data down, and the bond market has duly followed.
With domestic spending data largely holding up, no further escalation of trade wars, and hard Brexit expectations, in my view, overplayed, perhaps the BoE is right and the market is overhyping the chance of rate cuts.