The FTSE 100 and European stocks experienced gains on Friday, following a rebound in Asian markets, as investors processed the unexpected news of a 0.1% contraction in the UK economy during January. This downturn raises questions about the UK’s economic outlook and potential implications for global markets.
Table Content:
The Office for National Statistics (ONS) reported that the decline in Gross Domestic Product (GDP) was primarily driven by a 0.9% drop in the production sector, contrasting with the 0.4% economic growth observed in December. Economists had anticipated a 0.1% growth in January. While the services sector saw a modest 0.1% growth in January, following a 0.4% increase in December, construction output decreased by 0.2%, mirroring a similar decline in the previous month.
This economic data arrives just before the Chancellor’s Spring Statement, which is expected to outline government spending cuts. Chancellor Rachel Reeves acknowledged the global economic challenges and emphasized the government’s commitment to protecting the country, reforming public services, and stimulating economic growth. Reeves highlighted the government’s plans for increased defense spending and addressing obstacles to revitalize construction in Britain.
Market Performance and Global Economic Landscape
Despite the UK’s economic contraction, market sentiment was buoyed by hopes that the US government would avert a shutdown of non-essential services, following Senate leader Chuck Schumer’s indication of support for the latest funding bill.
Key market indicators showed:
- The FTSE 100 index rose by 0.6% in morning trading.
- Germany’s DAX climbed 0.4%, and the CAC 40 in Paris gained 0.6%.
- The pan-European STOXX 600 index was up 0.5%.
- Positive opening trends were observed in Wall Street futures, including S&P 500, Dow, and Nasdaq futures, signaling a potential rebound after recent declines.
However, global stocks remain on course for their worst week since September, even with Friday’s gains. The British pound weakened against the US dollar, trading at 1.2936, down 0.1%.
Gold prices experienced a surge, briefly exceeding $3,000 an ounce overnight before settling slightly lower at $2,986. The precious metal’s value has almost doubled in the past five years.
Goldman Sachs Downgrades UK Growth Forecast
In response to the unexpected economic contraction, Goldman Sachs revised its UK growth projections downward. The investment bank now anticipates 0.3% growth in the first quarter of 2025, compared to its previous estimate of 0.4%. The annual growth forecast for 2025 was also lowered to 0.9% from 1%, reflecting the “downside surprise” in UK GDP. This adjustment underscores the challenges facing the UK economy and the potential for further revisions in the coming months.
Conclusion
The unexpected contraction of the UK economy in January has sent ripples through global markets, impacting investor sentiment and prompting adjustments to growth forecasts. While market gains on Friday suggest some resilience, the underlying economic concerns remain. The Chancellor’s upcoming Spring Statement will be closely watched for policy responses to address these challenges and promote economic stability. The interplay between UK economic performance, global market trends, and policy decisions will continue to shape the investment landscape in the near term.
