UBS On-Air: Paul Donovan Daily Audio 'Resilience—economics 1, politics 0'
The desk contends that the UK's stronger-than-expected first quarter GDP, primarily propelled by consumer spending, underscores resilience in the face of rising oil prices and political challenges. As observed in the UBS commentary, UK consumers are adapting their purchasing behaviors, with shifts toward flexible working and online retail, which supports economic stability despite a decline in savings rates. In this context, we currently hold a consensus target of 1.075 for GBP/USD. The upcoming discussions regarding political dynamics and leadership within the Labour Party could create volatility but are not anticipated to significantly alter fiscal policy.
What the desk is arguing
The desk emphasizes that the UK economy, as illustrated by a surprising increase in GDP in Q1, is showing resilience, largely driven by consumer activity. Per the full note from UBS, this is noteworthy even as consumers have been compelled to dip into their savings to manage higher oil prices.
Moreover, the flexibility with which consumers are managing their oil demand—through trends like increased online retail—indicates an underlying adaptability that may buffer the economy against external shocks. A notable data point is the first quarter GDP growth exceeding expectations, which reinforces this positive outlook.
Where it sits in our coverage
Our consensus target for GBP/USD currently stands at 1.075, with a range spanning from 1.04 to 1.12. For context, jpmorgan sets a target of 1.10 for March 2026, while bofa positions itself at a more cautious 1.04 for the same tenor.
This stance aligns with the broader market perspective that anticipates steady economic conditions, although it reflects a slightly optimistic view compared to bofa, which presents a bearish outlook grounded in fiscal caution.
How other firms see it
Several firms, including jpmorgan, seem to align with our optimistic view, suggesting that resilience in consumer spending will carry through the fiscal year. Conversely, firms like bofa take a more tempered approach, citing potential political instability as a significant concern.
Watch the interrelations with pairs like EUR/USD, particularly as the economic outlook affects European monetary policy signals. These broader economic indicators will be pivotal in shaping market sentiment moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK Q1 GDP showed unexpected strength, with consumer spending driving growth.
- 02Rising oil prices are affecting savings rates, compelling consumers to adapt behaviors.
- 03Political dynamics, including potential Labour leadership challenges, may create market volatility.
- 04Current GBP/USD target remains 1.075, aligning with an overall positive economic outlook.
Market implications
Traders should monitor GBP/USD closely as it sits at 1.075, keeping an eye on potential fluctuations driven by the ongoing political discourse surrounding the Labour Party. The adaptability of consumer spending habits in response to economic stresses will also be pivotal in shaping future currency movements.
Risks to this view
A shift in UK political leadership that introduces significant fiscal changes could invalidate the current bullish outlook. Additionally, any dramatic changes in consumer confidence tied to economic outlook or external shocks, such as further increases in oil prices, may provoke market recalibrations.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday the 14th of May. Early guesses at UK's GDP data for the first quarter showed stronger growth than had been expected led by a more robust performance on the part of the consumer.
There was evidence of momentum continuing in March. The numbers were generally good. Even Bloomberg is going to struggle to find a negative spin for this data.
Consumer resilience in the UK is the same as it is in other countries. Household balance sheets entered the Gulf War in a good position and savings can be used to pay for higher energy prices. The UK consumer also probably has more flexibility than some others in terms of reducing oil demand through flexible working and online retail.
The data is, however, likely to be overshadowed, in the domestic media at least, by politics, with the increased probability of a challenge to Prime Minister Starmer. Former Deputy Labour leader Rainer has been cleared of wrongdoing in a tax investigation just in time to contend any possible contest. While there are attempts to portray this as a dramatic event, the reality is that whoever is in charge, fiscal policy is not likely to change substantially one way or the other.
The resilience of consumption will also be on display with US retail sales data for April. These numbers are not adjusted for inflation. Most countries do adjust their retail sales data for inflation.
The US does not, but given the amount of guesswork that goes into calculating US inflation these days, that's not necessarily a terrible idea. The soaring oil prices, which will also be reflected in today's import price data release, have pushed gasoline prices to over $4.50 per US gallon. And US consumers do not have the same flexibility to shift away from driving sports utility vehicles to favour alternative modes of transport that the UK or European consumers can do.
The result is that the value of retail sales will go up because prices have gone up. But even with that, the ability to still cut savings rates to pay for those prices should keep non-oil sales values supported as well. US Fed Chair nominee Walsh, who has denied being US President Trump's sock puppet, was confirmed to the post by the US Senate yesterday by the lowest majority ever in the history of the Federal Reserve.
That unusually low margin of confirmation may hint at some of the challenges Walsh is likely to face. The Fed has become more obviously divided in recent meetings and the traditional deference to the chair has certainly been reduced. Walsh's reputation within the Fed, from a previous gubernatorial term, and the external concerns about Walsh's independence mean that it may be more difficult to build a coalition around the chair's desired policy path.
Ironically, given Trump's preference for rate cuts, Walsh's appointment may make that more difficult to achieve, at least in the near term. The rest of the calendar today is fairly quiet. Bank of England Chief Economist Pill is due to speak, but is increasingly being viewed as an outsider on the Monetary Policy Committee.
Meetings between China's President Xi and Trump have been something of a nothing burger, if one could afford burgers with US beef prices up so much in recent quarters. There has been little in the statements that is particularly surprising. One of the main points of interest has been speculation about the possibility of an imminent visit to Beijing by Russian President Putin.
That's all for today. Have a good day. This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland.
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