GBP: High deficit and weak real economy – Commerzbank

Britain's fiscal challenges are mounting, with the latest data revealing a wider-than-expected budget deficit and deteriorating growth indicators. As government spending faces further cuts and the services sector slips into contraction, pressure is building on the Bank of England to loosen policy—potentially weighing further on the pound, Commerzbank's FX analyst Michael Pfister notes.

UK budget deficit widens amid weak growth

"Yesterday's figures showed once again why the UK is in a difficult situation at the moment. It started with the net borrowing figures for March, which were again slightly higher than expected. For the full fiscal year 2024-2025, which ended in March, borrowing was almost £24bn higher than estimated in October and £14bn higher than estimated in March. Net borrowing is likely to be higher than originally thought."

"In an initial analysis, the OBR identified two reasons for the widening deficit: firstly, public sector pay has continued to rise recently, pushing up spending. Second, the weak real economy has significantly reduced revenues. This is not a good sign as it points to a contraction in the real economy."

"At this point, you may be wondering why this is relevant to the pound, as developed market currencies tend not to react too strongly to fiscal news. However, the UK's recent growth has been almost entirely based on the public sector. So, not a good sign for the pound: less growth and more rate cuts at the same time."