UBS On-Air: Paul Donovan Daily Audio 'Growth and guessing'
The UK’s second-quarter GDP has been revised upwards, affirming its position as the fastest-growing G7 economy year-to-date, driven mainly by stronger investment metrics, as highlighted by UBS economist Paul Donovan. With a slight uptick in the consumer savings rate, households appear better positioned to support spending, despite lingering concerns about inflation from retail pricing strategies. This economic resilience suggests a potentially robust backdrop for the GBP in the near term, although broader market dynamics, particularly in the Eurozone and the U.S., may temper its performance. Per the full note source, upcoming inflation data from the Eurozone may have minimal impact, as central bank stances remain largely unchanged.
What the desk is arguing
The UK’s strong economic growth narrative is bolstered by an upgrade in second-quarter GDP figures, solidifying positive sentiment regarding its post-pandemic recovery. Per the full note source, the revision indicates that stronger investment has played a pivotal role in enhancing growth estimates, with the UK leading G7 peers in this regard.
Supporting this view, real disposable income growth has led to a marginal increase in the consumer savings rate, allowing households more leverage to maintain consumption levels, despite cautious sentiment towards inflation in retail pricing. The British Retail Consortium's Shop Price Index indicates that consumer price dynamics remain nuanced but could weigh on discretionary spending if inflation persists.
Where it sits in our coverage
Currently, our consensus target for GBP/USD rests at 1.075, with a range spanning from 1.04 to 1.12. Notable targets from other respected institutions include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This forecast positions the desk’s call toward the upper bound of the observed spread, indicating an optimistic outlook compared to bofa’s more cautious stance.
How other firms see it
Overall, firms such as jpmorgan project an aligned view towards UK economic recovery, while bofa expresses skepticism regarding sustained growth in the context of inflationary pressures.
As these developments unfold, the trajectory of GBP/USD may be influenced notably by upcoming ECB policy decisions and U.S. economic indicators, which could create spillover effects for the pound.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK second-quarter GDP revisions confirm it as the fastest-growing G7 economy.
- 02Rising consumer savings rate signals potential for continued spending amidst inflation concerns.
- 03Broad market outlook remains cautious with few immediate catalysts anticipated ahead.
- 04Consensus among firms provides a varied perspective on GBP's trajectory.
Market implications
Market participants should closely monitor the GBP/USD level around 1.075, indicating where recent upward momentum may stabilize. Additionally, watching how inflation reports from the Eurozone play out could provide additional context for GBP movements relative to broader market sentiment.
Risks to this view
A shift in sentiment due to unexpected inflation spikes or shifts in ECB policy could undermine the current optimistic outlook for GBP. Additionally, the potential U.S. government shutdown could create volatility that might detract from UK-centric economic narratives.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 30th of September. The UK delivered a final guess at second quarter GDP.
The data was revised up, cementing the UK's position as the fastest growing G7 economy so far this year. Stronger investment led the revisions higher. The consumer spending estimate was growing, unchanged from the previous estimate, with rising real disposable income.
This has meant the savings rate has been able to rise a little. That means that households do have the resources with which to consume, though they are perhaps wary of retailers trying to indulge in a little profit-led inflation. The British Retail Consortium's Shop Price Index showed a little more inflation in September.
This was due to less deflation in non-food items than last year. The timing of back-to-school discounting can complicate seasonal patterns in September, of course. After yesterday's moderate Spanish consumer price inflation data for September, we are inundated with more early price statistics from elsewhere in the Euro empire today.
France, Italy, Portugal and Germany all deliver their figures. None of them are expected to change very much from the inflation picture in August. And as markets are not expecting the policy stance of the ECB to change very much either, this is all likely to be a bit of a non-event.
ECB President Lagarde is speaking, but again, in the context of market expectations, it's unlikely that many in the markets will actually care that much. The United States is still heading for another government shutdown this evening. It may or may not happen, as this political theatre is a well-worn routine and very often a solution is created at the last possible moment.
This will lower the productivity of economists and journalists, if journalists are productive, as pointless hours are spent analysing the effects. The Bureau of Labour Statistics has said that they will not publish any economic data in the event of a shutdown. Of course, the Bureau of Labour Statistics economic data is subject to quality criticism.
But the problem is that the alternatives, like sentiment surveys, are even worse. And that's all markets will be left to work with in the absence of official numbers. There's an interesting question about whether the suspension of consumer price inflation data, for instance, might allow companies to sneak through some more profit-led price increases, knowing that they will not be detected.
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