The UK economy plays a pivotal role in the stock market, with various economic indicators shaping the understanding and predictions of market movements. It’s no secret that these indicators influence trends, decision-making, and the overall market sentiment.
In this article, we’ll be exploring these specific economic indicators and their impact on the various areas of UK markets.
GDP and economic growth
In recent months, the UK has seen rising interest rates, a surge in inflation and ongoing concerns of the cost-of-living crisis. The news of a looming recession has many investors and financial experts starting to consider divesting their portfolios. However, the stock market doesn’t have to experience a downturn during such financial turmoil.
The size of the economy is measured by Gross Domestic Product (GDP), and this analyses the market value of all goods and services produced in a specific period. Positive GPP growth signifies that the economy has grown, and vice versa.
When a country falls into a recession, we see a downward spiral in general economic activity, meaning the public is spending less money due to reduced demand. This, in turn, causes unemployment rates to rise and businesses to close.
But, it’s important to remember that economies and stock markets aren’t always correlated. Financial experts should remain proactive during uncertain times, ensuring any investments or trades made on their trading platforms are well-placed and diversified.
Unemployment rates and labour market data
The unemployment rate has a significant effect on the state of the economy. High rates suggest that there are not enough jobs being produced, meaning increasing amounts of people may have less disposable income. If the economy has low unemployment rates, this indicates many companies are thriving, making investors more likely to show interest.
The labour market can forecast stock prices to a certain extent. With more people out of work, the less demand there will be for various services and products, causing that company’s stock price to fall. The more profitable businesses that operate in stable economies are naturally much more appealing to financial experts.
Inflation and Consumer Price Index (CPI)
Rising costs and inflation indicate uncertain revenue growth. This can have an impact on a company’s profit margins and cause stock prices to fall as a result. In addition, high inflation creates uncertainty around future interest rates and therefore may contribute to market volatility.
The Consumer Price Index (CPI) also affects the UK markets. A rising CPI often suggests robust economic growth and a surge in demand for goods and services. However, a declining CPI could suggest an economic downturn and negatively impact the stock market.
Trade balances and exchange rates
Trade balances influence currency exchange rates due to their effect on foreign exchange supply and demand. When a country’s exports are not equal to its imports, there may be more supply or demand for a country’s currency.
A positive trade balance usually indicates that a country’s producers have an active foreign market. With enough goods to satisfy local demand, this means that there will be enough demand from foreign customers to keep local producers busy. Such international trade dynamics contribute to market movements and investor decision-making.