UK stagflation fears rise after latest GDP number

Pound Sterling under pressure after latest round of UK data causes concern..

Yesterday, the UK's labour data release was mixed due to wage growth remaining at record rates, but with job losses mounting. There was an initial bounce for GBP across the board as traders were fixed on what the wage outcome was. However, this dropped off once economists had seen the full report and digested the current state of play. 

Yes, there was an increase in total pay (including bonuses) to 8.5% from 8.4%. But excluding bonuses, wage growth was unchanged MoM. This is important because previous months have seen a large increase in wage packets and now it looks like a plateau has finally been reached. This mixed with the unemployment rate rising slightly points to softening in the labour market, which will bring down inflation further and allow the BoE to stop raising interest rates after this month potentially (bad news for GBP).

Today, the UK has surprised on the downside with GDP missing forecast by a fair distance. -0.5% was realised from a -0.2% estimate, a slump being put down to a wet July and the ongoing public sector strikes. This is a real warning sign that the UK economy could be about to enter stagflation, where high inflation marries falling growth. 

It puts pressure on the UK to deliver August growth, otherwise there is no doubt traders will turn £ negative. The Pound has moved lower after the news today, as markets await the US inflation report and digest the latest German economic news that the German Government expect to see its GDP number contract by -0.3% this year, as opposed to an earlier forecast of +0.4%. 


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