UK economy defies gravity with surprise July growth
The UK economy has demonstrated surprising resilience, with July GDP rising 0.4%, significantly above expectations for no growth, and following a 0.3% increase in June. This pattern showcases a noteworthy decline in inflation and robust activity primarily driven by the IT sector, which, despite representing just 7% of total economic output, contributed to about half of the growth in June. Per the full note from ING, the desk emphasizes that while the figures appear favorable, they might overstate actual economic progress due to seasonal adjustment challenges, especially against a backdrop of geopolitical tensions such as the Iran war.
What the desk is arguing
The desk believes that the UK economy is exhibiting unexpected strength, particularly highlighted by a 0.4% growth in July, which surpassed both the desk's and consensus expectations for zero growth. Per the full note from ING, this performance is attributed to strong growth in the IT sector and a generally more manageable inflationary environment.
Additionally, this economic activity is seen as partially misleading due to seasonal adjustments that tend to favor early-year performance. The desk anticipates that this growth momentum will likely wane in the latter half of the year, with ongoing risks to stability stemming from factors such as data distortions during periods of high inflation.
Where it sits in our coverage
In our current forecast, the consensus target for the GBP/USD currency pair stands at 1.075, with a trading range between 1.04 and 1.12. Key projections from major firms include: - jpmorgan: Target of 1.10 by March 2026 - bofa: Target of 1.04 by March 2026
The desk's interpretation aligns closely with jpmorgan's outlook, reflecting a bullish sentiment on the pound in light of recent economic data. However, this position leans towards the upper bound of the expected spread in the context of projected growth figures.
How other firms see it
Overall, firms such as jpmorgan and others appear to be aligned with a higher growth narrative based on recent data, whereas bofa holds a more cautious stance, anticipating potential headwinds.
In related currency dynamics, monitor the GBP/USD trajectory given its close correlation with UK economic indicators and the Bank of England's monetary policy direction in light of recent growth data, as shifts in sentiment could affect trading strategies.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK GDP grew 0.4% in July, exceeding expectations amid geopolitical tensions.
- 02The IT sector disproportionately contributed to recent growth, potentially fueled by advancements in AI.
- 03Seasonal adjustment challenges may be inflating the perceived economic stability in the UK.
- 04Anticipation of slowing momentum in the second half could impact future GDP readings.
Market implications
Watch the GBP/USD as it approaches resistance levels around 1.10 in the short term, influenced by upcoming economic releases. The current strength in the pound could shift depending on forthcoming inflation data or shifts in market sentiment due to geopolitical developments.
Risks to this view
The call could be invalidated if subsequent economic data reveals a sharp decline in growth or if inflation trends unexpectedly accelerate, prompting a reassessment by the Bank of England. Such changes could lead to a retraction in the GBP's strength and bring it closer to thresholds predicted by bearish forecasts.
Older quick take Quick take Published 07:56 United Kingdom UK economy defies gravity with surprise July growth The UK economy has performed much better than expected amid the fallout of the Iran war. Partly that is down to disproportionate growth in IT. Partly it's down to relatively benign inflation.
And partly, we think, it's down to 'residual seasonality' in the data. We expect momentum to slow through the second half Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download James Smith Developed Markets Economist, UK For the second month in a row, the UK economy has defied expectations and grown significantly faster than expected. Activity was up 0.4% in July against our own and consensus expectations for zero growth.
It was a similar story in June (0.3%). That said, we still think the GDP figures are overstating the true pace of economic growth. Roughly half of June’s rise in output was down to IT, a sector that makes up just 7% of total economic activity.
This is a recurring theme: on an annual basis, the sector makes up a third of the UK’s 1.5% year-on-year growth rate. Though it’s not totally clear what’s driving this, we suspect AI is playing a role. CapEx data for “other buildings” has been solid through this year, and we suspect that’s a euphemism for data centres.
IT has done a lot of the heavy lifting Source: Macrobond, ING "> Source: Macrobond, ING That aside, it's worth remembering that the UK’s GDP figures have a well-worn trend of performing better in the first half of the year than the second. That’s been the case ever since 2022, and we think that’s down to challenges with seasonally adjusting the data in a high inflation period. The performance of the three-month change in monthly GDP since the start of the year has been broadly consistent with this trend, though generally a bit stronger.
Still, it is undeniable that the UK economy has performed better than widely expected amid the fallout of the Iran war. We think that can be partly explained by the simple fact that inflation hasn’t risen as much as it could have done. Food inflation in particular has been surprisingly benign.
And that has helped ease the initial squeeze on households. How much longer that can continue, in an environment of rising energy prices and a fragile jobs market, is debatable. GDP data has broadly followed a familiar seasonal pattern this year Source: Macrobond, ING "> Source: Macrobond, ING As for the Bank of England, it has long appeared sceptical about the UK’s growth figures.
It has been relying instead on its own “survey-based” metric of activity, which through the first quarter had run significantly cooler than the GDP figures had suggested. And in any case, it remains squarely focused on inflation. While the rise in energy prices – particularly for natural gas – are a headache for the Bank, there is very little sign that the shock is broadening out into other areas of the inflation basket via so-called second-round effects.
We expect another 6-3 vote to keep rates on hold next week, and we remain unconvinced that the Bank will hike rates at all over the coming months. United Kingdom Growth GDP Bank of England Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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