Originally published at: https://blog.investengine.com/this-week-in-charts-the-uk-economy-shrinks/
This week’s market roundup focuses on the wider macroeconomic picture, both in the US and the UK.
GDP shrank in April in a blow to the UK’s Chancellor of the Exchequer, Rachel Reeves. Meanwhile, attention in the US turned to the Federal Reserve as inflation continues to cool.
Cooling US inflation encourages investors
US inflation in May rose 2.4% year-on-year, less than forecasted but slightly above expectations, but core inflation – which excludes food and energy – remained unchanged at 2.8%.
The data reflects persistent but gradually cooling price pressures. Investors reacted positively, with markets interpreting the figures as supportive of potential Federal Reserve rate cuts later in the year. Despite lingering inflationary concerns, the steady core rate suggests inflation is not re-accelerating.
The Federal Reserve held interest rates steady after its June meeting but signaled it may only cut once in 2025, fewer than previously anticipated. Market sentiment remains focused on how inflation trends will influence future monetary policy decisions.
Source: Bloomberg
A difficult April for Rachel Reeves
The UK economy contracted by 0.3% in April, in line with projections but worse than the consensus 0.1% decline, following gains of 0.2% in March and 0.5% in February.
Services, the main drag, fell by 0.4% due to higher Stamp Duty shifting housing activity into March, hitting sectors like estate agencies. This is expected to unwind in May.
Consumer-facing services rose 0.1% in April, after 0.6% in March, reflecting cautious household spending. Manufacturing dropped 0.9%, led by a fall in car production as new US tariffs took effect. A UK-US trade deal may offer only modest future relief, with implementation still pending.
Source: Bloomberg
Unemployment rises in the UK as labour demand falls
UK labour demand continued to weaken in May, with payroll employment falling by 109,000 – though the data carries high uncertainty. On a three-month basis, the number of employees declined by 66,000, confirming a downward trend.
Job vacancies also dropped, falling to 736,000 in the three months to May, 63,000 lower than the previous quarter and below the 2016–2019 average of 800,000.
Meanwhile, the unemployment rate rose to 4.6% in the three months to April, up from 4.5%, matching expectations. Due to low response rates in the Labour Force Survey, analysts suggest using a wider range of indicators to assess labor conditions.
Source: Bloomberg
More interest rate cuts to come in 2025
The Bank of England (BOE) needs falling private sector pay growth to be confident inflation will return to its 2% target. The Monetary Policy Committee noted that some economic slack is required to normalize pay and price-setting behavior.
Recent jobs data may surprise the BOE and reduce the likelihood of a prolonged rate pause this summer. The base case forecasts rate cuts in August and November, reaching a low of 3.5% by February. However, the risk now is that the BOE may accelerate the pace of easing in the second half of the year in response to changing conditions.
Source: Bloomberg
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