Economic Overview
The UK economy has reported a second consecutive monthly contraction in GDP, indicating a deteriorating economic environment and raising concerns about the country's short-term economic outlook. In May, the GDP shrank by 0.1%, following a 0.3% decline in April. This downturn was primarily driven by a 0.9% drop in industrial production and a 0.6% decrease in construction output. Although the services sector managed a slight expansion of 0.1%, it was insufficient to offset the overall economic weakness.
Market Reactions
The disappointing economic figures surprised market analysts, who had anticipated a slight rebound in May. If the June data also indicates negative growth, the UK will experience its first quarterly contraction since Q4 2023, following a stronger-than-expected 0.7% growth in Q1. Chancellor Rachel Reeves described the results as "disappointing" but emphasized the government's commitment to long-term recovery through targeted investments and social support initiatives.
Bank of England's Response
With inflation easing and economic momentum faltering, attention is shifting to the Bank of England (BoE). Markets are currently pricing in a 78% probability of an interest rate cut at the BoE's August meeting, which would lower the current base rate of 4.25%. This move is widely viewed as essential for stimulating economic growth.
FTSE 100 Performance
Despite the bleak macroeconomic backdrop, the FTSE 100 index has shown remarkable resilience, reaching a record high just below the 9,000 mark. However, there was a slight cooling in bullish sentiment following the GDP report, with the Relative Strength Index (RSI) dropping to 65, likely due to profit-taking. Nevertheless, the technical outlook remains positive, and the 9,000 level may attract renewed buying interest soon.
The strength of the FTSE 100 has been largely attributed to the outperformance of the mining sector, with major companies like Glencore, Rio Tinto, and Anglo American reporting significant gains. Investor sentiment remains optimistic, bolstered by expectations of a more supportive policy environment and potential shifts in U.S. trade policy.
Risks Ahead
Despite the current positive sentiment, risks persist. If optimism surrounding global trade agreements diminishes or if domestic fiscal pressures escalate, the prevailing positive sentiment could quickly reverse. Investors are advised to remain cautious of these potential headwinds, even as technical and sectoral dynamics continue to support the FTSE 100's upward trajectory.