The FTSE 100 suffered a significant blow on Wednesday, tumbling into the red as investors reacted to a dire snapshot of the UK's economic health. The blue-chip index fell 0.7% in early trading, reflecting a wave of pessimism sweeping through the City.
The catalyst for the sell-off was official data from the Office for National Statistics (ONS), which showed the UK economy recorded zero growth in April. This disappointing stagnation followed a modest 0.4% expansion in March, dashing hopes for a sustained recovery.
Services Sector Slowdown Sparks Concern
A primary driver of the slump was a sharp contraction in the UK's dominant services sector. Output from consumer-facing services, a key barometer of economic vitality, fell by a worrying 0.7%. This decline suggests that households are continuing to rein in spending amidst the ongoing cost-of-living crisis.
The poor GDP figures have fundamentally altered market expectations regarding monetary policy. Traders and analysts now believe the stagnant economy, coupled with stubbornly high inflation, leaves the Bank of England with little room to manoeuvre.
Interest Rate Cut Hopes Fade
Prior to this data, many anticipated the Bank's Monetary Policy Committee (MPC) might begin cutting interest rates from their current 16-year high of 5.25% in August. However, the combination of no growth and persistent price pressures makes an imminent cut increasingly unlikely.
"The stagnant GDP reading and the services sector slowdown are a toxic mix for the Bank of England," said a leading market analyst. "It reinforces the 'higher for longer' narrative on interest rates, which is directly weighing on market sentiment. The FTSE is reacting precisely to this delayed relief for borrowers and businesses."
The gloomy economic outlook sent ripples beyond the FTSE 100. The domestically-focused FTSE 250 mid-cap index, often seen as a more accurate reflection of the UK's economic health, also fell sharply, down 0.6%.
A Weakened Pound and Global Context
In currency markets, the pound held steady against the US dollar but remained near recent lows. Sterling's weakness often provides a boost to the FTSE 100's multinational constituents, whose overseas earnings are worth more in pounds. However, this effect was overwhelmingly negated by the potent fears surrounding the domestic economy.
The negative trading session in London contrasted with a more positive mood in other global markets. European indices like the DAX in Germany and the CAC 40 in France posted modest gains ahead of a key interest rate decision from the US Federal Reserve, highlighting the UK-specific nature of the day's financial anxieties.
