GBP looking healthy with GDP

UK GDP (April 2023)

GDP recovers as retail recovers from March washout;

Source; Finlogix Economic Calendar

UK GDP in April recorded a growth of 0.2% month-on-month (m/m), aligning with consensus expectations. This indicates a partial recovery, often referred to as a 'bounce back', from the weaker-than-anticipated growth of -0.3% m/m in March. As anticipated by the PMI surveys, the rebound in economic activity was primarily driven by the services sector. The April PMI survey indicated an improvement in the Services PMI, rising from 52.9 in March to 55.9. Conversely, manufacturing experienced a decline. Services expanded by 0.3% m/m in April, contributing positively to the overall GDP growth by 0.26 percentage points (ppts). Notably, the wholesale and retail sector, as well as the information and communication sector, made significant contributions within the services industry. Retail saw a recovery from the negative impact of wet weather in March. Additionally, the information and communication sector benefited from film and TV production, as reported by the Office for National Statistics (ONS).

On the other hand, the health sector had a slightly negative m/m contribution to overall services growth, amounting to less than 0.1ppts, primarily due to strikes affecting activity. The industrial sector, overall, made a downward contribution, with a 0.3% m/m decline in output. Manufacturing contracted by 0.3% m/m, with eight out of its thirteen sub-sectors experiencing a decline. The pharmaceuticals sector played a significant role in this contraction, as its output fell by 5% in April. Similarly, the construction sector contributed to the downward trend, with a 0.6% m/m decline in output after two consecutive months of growth. Private housing repair and new work were the primary factors behind this monthly contraction, reflecting a broader slowdown in housing activity.

In summary, UK GDP growth remains resilient overall, although it shows a relatively stagnant trend. Looking ahead, the PMI surveys suggest an increase in activity in April and May, particularly in the services sector, projecting a q/q growth rate of 0.3%-0.4% for the second quarter (Q2) as a whole.

However, it is important to note that the extra bank holiday in May for the coronation is likely to result in a significant m/m contraction in GDP. Although the impact of additional public holidays related to royal events has diminished in recent years, last year's GDP contracted by 0.7% m/m in June and September due to the presence of extra public holidays in those months. Assuming a similar pattern this May, it will be challenging to avoid a contraction for the entire second quarter. Nevertheless, the effect on Bank of England policy is expected to be minimal. The May Monetary Policy Report projected 0% q/q GDP growth for Q2, and any impact is likely to be temporary, with the lost output generally being recovered in subsequent periods.

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