Since the onset of the financial crisis in late 2008, the UK economy embarked on what appeared to be a never-ending struggle.
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Private consumption collapsed, inflation combined with stagnant wage growth eroded the purchasing power of households, and the government embarked on tax increase and cuts in spending plans to bring the public finances back to order. Five years prior to the recession, the UK economy recorded cumulative real growth of around 17%. Since Q3 2008, the economy has contracted by around 3% in volume terms.
Economic indicators suggest a turn in UK fortunes
However, all this seems to be changing. Economic indicators suggest a turn in UK fortunes. The July Services PMI recorded its highest number since 2006; UK retail sales continue to remain strong (as in most developed economies, private consumption forms the bulk of UK spending), while Q2 GDP recorded a solid 0.7% q/q growth. The Barclays UK data surprise index is currently close to its 4-year high (Figure 1).
Not only does improved UK economic data support sterling by making investors less sceptical about the economy and the currency but, as discussed above, rising growth expectations make it harder for the BoE to talk down interest-rate expectations and longer-end yields. All this is good news for GBP.
Figure 1: UK data continues to beat market expectations