OPINION
Market Rating Before FOMC MeetingJan 31
UK Economy Faces Recession Risks
In this period, industrial production contracted by 0.6 percent compared to the previous month, and increased by 0.7 percent, below the market expectations of 1.7 percent compared to the same month of the previous year. Manufacturing production, known as the sub-sector of the industry, contracted by 0.1 percent monthly and expanded by 0.5 percent on an annual basis.
In April, construction production contracted by 0.4 percent and increased by 3.9 percent annually. While the service sector did not show any change, the trade balance gave a deficit of 20.86 billion pounds.
The data released by the Office of National Statistics show that; Industry, construction, and service activities, which are the leading sectors of the UK economy, are under pressure from the effects of the Bank of England (BoE) interest rate hikes and the Russia-Ukraine war. While the decline in new orders with the reflections of the Ukraine war was the main determinant of the decline in industrial production, it is clear that the inflationary climate and rising household borrowing costs weakened the services and construction products. It is understood that the weak pound has recovered the deficit trend in the trade balance.
Looking at the high-frequency data on a monthly scale, the deceleration in the leading sectors of the economy, which started in the last quarter of 2021, has reached a contraction path as of the second quarter of the new year. In the environment of high energy costs in international markets and the uncertainty brought about by the war, it seems likely that the BoE will pause the monetary tightening process so that the British economy does not face a recession. However, this situation may weaken the pound among developed country currencies.
