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UK monthly GDP figures for May surprised firmly on the upside, reporting a large and broad-based rebound in real economic activity: notwithstanding the cost-of-living surge and intense price pressures for inputs, GDP increased by 0.5% on the month (consensus: 0.0%, Investec -0.2%). Moreover, there were upward revisions to the back data too, with March and April numbers 0.2%pts and 0.1%pts higher than previously reported, respectively.
The details of the report reveal human health and social work activities to have been an important driver of aggregate output growth, its 2.1% increase accounting for 0.2%pts of monthly GDP growth. This reflects a surge in GP appointments, which was large enough to more than offset a fall in NHS Test and Trace and Covid vaccinations (which in itself subtracted 0.2%pts from output). But the overall picture is that output gains were broad-based, with manufacturing posting its largest monthly rise since November 2020 (+1.4%), construction jumping by 1.5%, and even consumer-facing services down only 0.1%, as clearly weaker spending on sports activities and amusement and recreation activities (-5.3%) and lower retail sales (-0.5%) were largely offset by a surge of 11% in travel-related services. This is consistent with an uneven picture of spending across the income distribution: whereas some parts of consumer spending are evidently suffering, others are still benefitting from pent-up demand and the high stock of savings to fund it. In other words, for the time being, there is little sign that the cost-of-living crisis, coupled with the National Insurance Contributions hike, has caused an aggregate spending crunch, consistent with a degree of resilience of total consumer spending.
One caveat to bear in mind is that the shift in the timing of the Bank Holiday that usually takes place in May to early June this year as part of the Platinum Jubilee celebrations may not have been accounted for accurately. Although an adjustment to strip out the effect of the extra working day was made, this may not have been complete. That GDP growth was quite so broad-based reinforces our doubts. The ONS itself acknowledged as much, noting that the timing of bank holidays ‘might lead to more volatile movements in the monthly path of GDP in May and June’. It is therefore possible that some of the reported strength in today’s data is reversed in the June numbers.
Looking ahead, we continue to see the squeeze from higher prices and also rising interest rates as likely to build. A particular pinch point remains energy; utility bills look poised for a percentage rise in October of a similar magnitude as in May, which is more than what had been factored in when the government put together its revised support package to households in late May. Given the resilience of the economy so far, and the potential for second-round effects in wage setting still looming large, the BoE may well see the case for ‘forceful’ policy action as reinforced by today’s data. As firms and eventually households respond to this, we expect the economy to tip into a technical recession around the turn of the year – likely prompting an about-turn in policy rates in due course later in 2023.
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Race to succeed Boris hots up
11 July 2022
The number of Tory candidates who have so far declared their intention to run in the Conservative Party leadership contest to succeed Boris Johnson has reached ten and includes names such as Rishi Sunak, Penny Mordaunt, Jeremy Hunt, Liz Truss and Sajid Javid. Perhaps surprisingly the bookmakers' favourite last week, Defence Secretary Ben Wallace, has ruled himself out, stating his priority focusing on defence given the backdrop of the war in Ukraine. As of this morning oddschecker has Rishi Sunak as the favourite.
In terms of the process for the leadership contest, a meeting of the 1922 Committee later today will set out the terms of the election, in particular the number of supporting MPs a candidate must have in order to meet the threshold for running. Reports over the weekend suggest that the Committee want to whittle down the field quickly by setting a high threshold for entry. It had been suggested that it could be as high as 10% of the Parliamentary party, i.e 36 MPs, whilst a lower threshold of 20 MPs has also been mooted. After this, formal nominations are expected to open on Tuesday followed by the first round of voting on Wednesday, with the ultimate aim of having the final two candidates before Parliament goes into recess on 21 July and the intention, following votes in the summer by the grassroots party members of the party, to have a new PM take office on 5 September.
Given the backdrop of significant headwinds to the economy, tax cuts have been a primary campaigning tool of several candidates. For example Jeremy Hunt has pledged an immediate cut in corporation tax to 15p, whilst Javid has argued for a 1p cut per year, plus a reversal of the national insurance rise. The majority of the remaining candidates have also argued for lower taxes, although the odd one out is former Chancellor Rishi Sunak, who has continued to argue for more responsible fiscal policy. One read across from this is that if any of the tax cut-backing candidates win the election the more expansionary stance of fiscal policy could lead to the BoE having to tighten monetary policy more aggressively as it battles continued high levels of inflation.
More evidence of wage pressure in the UK
08 July 2022
Trade union Unite announced that it had agreed a ‘vastly improved’ pay deal with British Airways, leading to a suspension of the threat of strike action by check-in staff at London Heathrow. BA has also struck a deal with the GMB union, again averting industrial action by its members. Certainly specific factors in the airline industry played a part in this.
Strike action, or the threat thereof, is by no means confined to this sector, however – the rail industry, criminal barristers, teachers and others are in similar positions. Resolving pay disputes in the public sector may be particularly challenging in the UK currently, in the political vacuum that has ensued following the resignation of Boris Johnson as Prime Minister. The broader picture is that of a very tight labour market, which increases the bargaining power of employees when it comes to securing some compensation through pay for the surge in the cost of living. Firms, however, may not be able or willing to absorb this without passing on cost increases through to the consumer level – in turn prolonging and extending the inflationary impulse.
This is troublesome for the Bank of England and may lead to further interest rate rises to cool demand more decisively. But effects may be broader still: in the NHS, the CFO of NHS England has suggested that each percentage point above 3% in pay settlements would cost £900m-£1bn. In the absence of more money being made available by the Treasury to cover this, cuts to services would have to be made that would compromise care, including for cancer. A difficult period lies ahead: we anticipate a mild recession in the UK around the turn of the year, albeit one that – not being a financial crisis – is certainly not as deep as the global financial crisis.
Sterling rises despite political vacuum as Johnson resigns
07 July 2022
After a dramatic few days in UK politics, our Economics Team looks at who could replace Boris Johnson as prime minister and what that might mean for government policy.
In Ernest Hemingway’s The Sun Also Rises, a character, when asked how he went bankrupt, replies, “Two ways. Gradually, then suddenly.” Much the same can be said to describe how Boris Johnson’s position as UK Prime Minister ended. After what can be politely described as two days of utter domestic political chaos, PM Boris Johnson signalled his intention to resign earlier this morning. He intends to remain in situ at 10 Downing Street as caretaker prime minister until a replacement is chosen.
The next stage will be for the Conservatives to elect a new leader. The process is that Conservative MPs vying for the leadership need to declare their candidacy. Then all Tory MPs will eliminate the contenders one by one in successive rounds of voting until two remain. After a campaign, there will be a head-to-head vote among grassroots party members to select the leader. The timetable for the rounds of voting among MPs will be announced next week and, depending on the number of candidates, should be completed relatively quickly. However, the membership vote will not likely to be concluded until autumn.
Boris Johnson to resign as UK prime minister
07 July 2022
In contrast to the line pursued yesterday, it is now expected that Boris Johnson will resign as Prime Minister of the UK today. Several further ministerial resignations have been announced this morning, including Michelle Donelan, appointed as Education Secretary just 36 hours ago. Meanwhile, Nadhim Zahawi, the newly appointed Chancellor, publicly called for the PM to leave office. Staff inside 10 Downing Street have reportedly spoken with Mr Johnson, and a resignation letter is now believed to have been prepared.
Boris Johnson will make a public statement, expected around lunchtime, to formally announce his resignation. The question now is who takes over in the interim, while a new Conservative leader is chosen - a process which could take months. It is understood that Boris Johnson would prefer to stay on as caretaker, but MPs seem to be in favour of another line. It now looks more likely that Deputy PM Dominic Raab will take over in the meantime, and most ministers will be reappointed to their respective positions for the summer. Later today, we will publish a full note on both the resignation and the outlook going forward.
UK Prime Minister Boris Johnson on the brink
07 July 2022
Turmoil in UK Prime Minister Boris Johnson’s government has broadened. Mr Johnson has so far refused to resign from his position. This is notwithstanding the resignation of 50 ministers at the latest count – started by that of Chancellor Rishi Sunak and perhaps most significantly Health Secretary Sajid Javid, but now extending to others from within Cabinet such as, as of this morning, Northern Ireland Secretary Brandon Lewis as well as a string of more junior ministers and PPS. Even among those that have not tendered their resignation, many of those previously loyal to Johnson such as Home Secretary Priti Patel, Business Secretary Kwasi Kwarteng and Attorney General Suella Braverman – as well as newly appointed Chancellor Nadhim Zahawi and new Education Secretary Michelle Donelan – are said to have entreated Mr Johnson to resign. A similar call by Levelling Up Secretary Michael Gove has been met by him being sacked.
The situation remains in flux, but reports are that Mr Johnson has threatened his colleagues with early elections to deter them from ousting him, although he subsequently denied this when questioned in the Liaison Committee. Should Mr Johnson continue to refuse to leave office, the elections to the 1922 Committee of backbench MPs on Monday will give an opportunity to the new committee, should they so decide, to change the rules that currently prevent a second no-confidence vote in the Prime Minister within a year of the previous one and theoretically leave Johnson safe in his job until June 2023. The expectation is that Mr Johnson would lose such a vote if a re-run were held before the summer recess that starts on 21 July. Whereas that seems very plausible to us, this is not entirely certain, given that it is not clear how many of those who have currently resigned from government, and of MPs who have publicly announced they have sent letters of no confidence in the Prime Minister to Sir Graham Brady, the Chair of the current 1922 Committee, already voted against Mr Johnson at the previous no confidence vote. However, the Telegraph reports that Tory Whips estimate just 65 MPs would back the PM in a second vote.
Notwithstanding the current political turmoil, sterling has trended up since yesterday morning. A factor behind that may be that, under a new leadership, the possibility of a more conciliatory stance regarding the Northern Ireland Protocol opens up, and chances of Scottish independence may also recede. Both, however, will depend on how the situation is resolved – and on who, if anyone, eventually becomes the new Prime Minister.
UK prime minister under pressure as resignations continue
06 July 2022
Following the resignations of Rishi Sunak and Sajid Javid from their ministerial posts last night, Conservative MPs have continued to withdraw their support for Prime Minister Boris Johnson this morning via further resignations and submission of letters of no confidence. Mr Johnson survived a vote of confidence one month ago today, winning by a margin of 211-148, but given the latest developments, it is likely that the PM would not survive another.
Under the current party rules, another vote of no confidence in the Prime Minister may not be held for twelve months. However, there has been speculation about changing this rule to allow a second vote sooner. Previously it was expected that this might only change following the elections to the 1922 Committee later this month, but political reporters are now suggesting that the current committee will meet at 5:00pm this evening to discuss amending the rules imminently. In this case, assuming the threshold of 54 letters of no confidence were met, another vote of no confidence in Boris Johnson could be held in the next week. It is looking increasingly likely that the UK will have a new Prime Minister in the not-too-distant future. Boris Johnson is now making his way to the House of Commons for PMQs at 12:00pm.
UK Chancellor and Health Secretary resign
06 July 2022
UK Prime Minister Boris Johnson suffered another blow yesterday when Rishi Sunak and Sajid Javid both resigned from their posts within minutes of each other. A number of other junior ministers also quit, including Alex Chalk, the Solicitor General. Mr Johnson looks even more vulnerable now, especially with the elections to the Conservative backbench 1922 Committee taking place next week. A new committee could potentially change the rules to enable a challenge to Mr Johnson's leadership before June next year, as specified by the existing party rules - rumours suggest the possibility of another challenge even ahead of the summer recess, which begins on 21 July.
A government reshuffle followed last night with Nadhim Zahawi taking over as Chancellor and Steve Barclay as Health Secretary. Typically political turmoil results in a sell-off in the currency, but markets were highly volatile yesterday and there was no major reaction by sterling. In any case, one might argue that a more likely departure of Mr Johnson, the chances of which have arguably risen, could result in a less confrontational approach to negotiations with the EU over the Northern Ireland protocol, reducing the risks of trade tensions with the 27 nation European bloc.