Data doubts linger as UK growth beats expectations
The desk interprets the recent UK GDP data with cautious optimism, noting that while the growth appears robust, it is clouded by significant doubts regarding sustainability. Per the full note from ING, GDP rose by 0.7% over the past three months, with May's growth at 0.1% exceeding expectations; however, the backdrop of weak consumer services and a softening jobs market raises questions about this data's reliability. This skepticism is further supported by historical trends, where UK growth typically flattens during the summer months, leading us to anticipate a slowdown in Q3. As we approach the potential catalysts for market moves, this uncertainty could influence currency pairs reflecting UK sentiment, notably GBP/USD.
What the desk is arguing
The desk frames this as an important juncture for GBP trading, given the conflicting signals in growth data. The reported GDP growth appears deceptively strong, yet surveys indicate weakening activity levels, suggesting a disconnect between reported figures and underlying economic trends.
Notably, the private sector payrolls are declining, and the services PMI has weakened, signaling potential headwinds. This divergence makes the volatile economic landscape particularly precarious, and we anticipate a slowdown as we move into the summer months.
Where it sits in our coverage
Currently, our consensus target for GBP/USD sits at 1.075, with a range that reflects varying outlooks: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Our view aligns closely with jpmorgan, suggesting that the desk’s assessment of potential downside risk is at the upper bounds of the market's pricing spread. This could mean short-term traders might find opportunities on both sides of the market.
How other firms see it
Overall, firms like jpmorgan maintain an optimistic outlook on GBP's performance, focusing on a possible recovery. In contrast, bofa is more cautious, anticipating lower targets for GBP/USD under the current economic conditions.
With the UK's jobs market and inflation statistics heavily influencing sentiment, watching the EUR/GBP might yield insights into how the ECB's policy could affect the pound against the euro.
What the calendar says
No high-impact events are on the calendar in the coming weeks that could reshape the current narrative significantly. However, monitoring UK employment data and any indications from the Bank of England's policy direction will be crucial as we move deeper into the summer.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK GDP growth of 0.7% over the previous three months, with May exceeding expectations.
- 02Underlying economic indicators, including the services PMI and job metrics, suggest potential weaknesses.
- 03Historical patterns indicate the likelihood of slowing growth in Q3.
- 04The UK's economic outlook remains highly contingent on forthcoming employment data.
Market implications
Traders should watch for GBP/USD movements around the expected downturn in Q3 growth, as candlestick patterns might reflect shifts from shorts driven by weaker consumer metrics. The current target of 1.075 may face pressure if downside risks materialize.
Risks to this view
A stronger-than-expected rebound in consumer spending or significant employment gains would invalidate the current outlook, pushing GBP/USD back towards previous highs and challenging our cautious positioning.
Older quick take Quick take Published 08:00 United Kingdom Data doubts linger as UK growth beats expectations Ongoing strength in UK monthly GDP fits a familiar pattern seen in recent years, with growth tending to outperform in the opening months of the year before losing momentum later on. We expect activity to slow into the summer We expect UK growth to slow into the summer Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Smith Developed Markets Economist, UK We’re still a bit dubious about the UK’s latest growth data. On the face of it, it looks great.
Monthly GDP is up by 0.7% over the past three months, relative to the three prior months. Growth for May specifically was a tad better than expected at 0.1%, against expectations of no or even negative growth. Yet there is still an active debate over how reflective this is of the underlying growth picture.
Surveys are generally weaker; the services purchasing managers index turned markedly weaker in May. And the jobs market continues to paint a very different picture. Private sector payrolls are still falling, and the pace of weakness in consumer services is showing little sign of abating.
The Bank of England’s Decision Maker Panel survey points to further modest declines in employment, too. The strength in these monthly GDP figures also fits into an eerily familiar pattern, whereby, ever since 2022, the data has been considerably stronger in the first half of the year than the second. Though the Office for National Statistics analysis disputes this, we, like other economists, suspect there are underlying challenges with the way the data is being seasonally adjusted.
It follows that we’re likely to see a marked slowdown in growth in the summer. Growth this year fits into a familiar seasonal pattern Source: Macrobond, ING "> Source: Macrobond, ING Notwithstanding those issues, it’s also interesting how concentrated growth has been in recent history. In annual terms, monthly GDP is growing by 1.3%.
But 0.8pp of that comes from sectors representing only a quarter of overall output. The IT sector has consistently contributed a disproportionate amount of UK growth relative to its size, perhaps pointing to an AI effect. Though output here fell through May, that followed remarkable strength in March and April.
A few small sectors are driving UK GDP Source: Macrobond, ING "> Source: Macrobond, ING The bottom line is the UK economy probably has genuinely had a reasonable start to 2026 – albeit not quite as strong as these growth numbers suggest. More importantly, the impact of the Iran war and the spike in energy prices is likely to show more clearly over the summer. We’d expect growth to slow to 0.1-0.2% in the third quarter, after what’s now likely to be 0.4% in Q2.
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