Image © Adobe Images
Third quarter GDP is the next major calendar event for sterling, and there’s a risk it disappoints.
This is the view of economists at Lloyds Bank, who warn Tuesday’s soft jobs report signals a potentially disappointing outcome.
How so? Economists at Lloyds say a “striking feature” of the jobs report was news that total hours worked fell in the third quarter.
“That has potentially important implications for tomorrow’s Q3 GDP report,” explains Sam Hill, Head of Market Insights at Lloyds. “The only way output can rise is if inputs rise, or if there is an improvement in the efficiency of the inputs to the production process (aka productivity gains).”
Image courtesy of Lloyds Bank.
The UK has a chronic productivity problem, and Hill says the indicator from the labour market report points to downside risk to the consensus expectation for GDP growth of 0.2% q/q.
“If labour input fell, it limits the extent to which output can expand. In this sense, the UK macro news that could have a bearing on market expectations for the December MPC meeting is far from over for the week,” he says.
This has implications for the pound, which has steadily fallen as expectations for a December rate cut at the Bank of England have risen.
Above: Market-implied expectations for future reductions in Bank Rate.
The market can continue to raise odds for a December rate cut, and a February rate cut on further poor data, which implies further weakness for pound exchange rates.
The probability of a December rate cut rose from 70% to 85% after the ONS said Tuesday that the UK’s unemployment rate rose to 5.0% in September.
The PAYE measure of employment meanwhile showed a fall of 32k jobs in October, making for the biggest fall since November 2020.
However, robust PMI survey data and official retail sales figures covering the third quarter offer a counterpoint, hinting at a strong quarter.
If so, then the pound might find some relief.
However, the currency is also now contending with news of a potential challenge to Prime Minister Keir Starmer’s leadership, which risks upsetting any data-led gains for the currency.
