UK On The Brink Of Recession While US Growth Remains Robust: Fed Doves To Drive Markets In Early 2024

The U.K. is teetering on the brink of recession after revised data Friday shows the economy shrank in the third quarter as falling productivity and investment weigh on growth.

Figures from the Office for National Statistics show gross domestic product fell by 0.1% in the July-September period, a downward revision from the flash estimate of zero growth.

Second-quarter GDP was also revised lower to show zero growth, down from the previously estimated 0.2% increase.

The initial market reaction sent indexes in London lower. They recovered by late morning, however, and the FTSE 100 was up 0.1% by midday in London. The iShares MSCI United Kingdom ETF EWU, a New York-listed exchange traded fund that tracks U.K. stocks, was up 0.2% in premarket U.S. trade.

The U.K. now stands on the edge of a technical recession — two quarters of negative GDP — and has been the worst-performing G7 economy since before the pandemic.

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US Growth Remains Robust

By contrast, and despite fears of a slowdown, U.S. growth is buoyant. Data from the Bureau of Economic Analysis on Thursday showed U.S. GDP gained by an annual rate of 4.9% in the third-quarter — up from 2.1% in the previous three months.

The U.S. data reflected increased consumer spending — the bedrock of the U.S. economy — and inventory building following the supply chain crisis of recent years.

There were few signs that investors were scarred by Wednesday’s sharp market losses, and all U.S. indexes closed around 1% higher on Thursday, while stock index futures indicated a flattish open Friday. The SPDR S&P 500 ETF SPY gained 0.9% on Thursday and was 0.1% higher in premarket trade.

How Will UK, US Markets Perform In 2024?

Looking ahead, it’s difficult to predict how these markets will compare in 2024, since global equity trade appears to have decoupled from fundamental drivers.

The euphoria driving the global markets is based on expectations the Federal Reserve will soon start cutting interest rates, and hopes that the U.S. economy won’t suffer too severe a downturn.

The Fed funds rate and the U.K. base rate are both at similar levels, but that’s where the similarity ends. U.K. inflation, at a sticky 3.9%, is outrunning the U.S. rate of 3.1%. U.S. growth, as shown above, is outpacing U.K. stagnation.

“The Fed currently expects core PCE inflation to average 2.4% in the fourth quarter of next year, so we expect their next forecasts to bring another downward revision, opening the door to easing either at that meeting or in May,” said Ian Shepherson, chief economist at Pantheon Macroeconomics.

The Bank of England is clearly still in wait-and-see mode on monetary policy, while the Fed has turned dovish. Thus, it’s still likely to be Fed rate-cut expectations that drive the markets in the New Year.

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