Relief for British Pound as UK GDP Data Points to Better Growth into Year-End

"One would expect business to be cautious ahead of the Brexit negotiations, however, the fact that capital investment is stronger than expected is good news" - Kathleen Brooks, City Index.

• Quotes:
• Pound to Euro exchange rate: 1.0873, +0.32%
• Pound to Dollar exchange rate: 1.2818, +0.16%

The preliminary estimate for U.K. economic growth in the second-quarter was confirmed in line with the prior release and a survey showed investment intentions rising, despite a slowdown in business investment during the recent quarter.

The Office for National Statistics on Thursday, August 24 released their second estimate for gross domestic product whcih showed the economy growing at a rate of 0.3%, which was in line with prior estimates.

Business investment was unchanged from the prior period during the three months to the end of June, at £43.8 billion which is disappointing in that economists were forecasting a pickup to the tune of 0.4%.

But look under the hood, and the figures suggest one-off factors are responsible for the slowdata and there are many positives.

The heavily oversold Pound Sterling bounced in the wake of the data release and we believe this might be because traders have noted the positives.

Of course, the Pound could be enjoying a "dead-cat bounce" within the confines of a decidedly negative downtrend. But maybe markets are coming on board with the theme we have been reporting on of late that suggests Sterling is heavily oversold.

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Breaking Down the Data: Outlook Not All Bad

Sentiment towards the UK and Sterling - as per the popular press - is decidedly negative with reams being printed on the UK's economic slowdown.

Often these reports are guilty of not looking ahead and missing the signs concerning future economic activity. In short, it's old news.

Gross Fixed Capital Formation (capital investment) between Quarter 2 2016 and Quarter 2 2017, was estimated to have increased by 2.5%, from £77.5 billion.

"One would expect business to be cautious ahead of the Brexit negotiations, however, the fact that capital investment is stronger than expected is good news, and suggests that some investors are willing to look through Brexit to our future outside of the EU," says Kathleen Brooks, research director at City Index. 

Also shown in the data was a slowdown in household spending, a theme confirmed in other surveys owing to the fact that UK wage growth is being outstripped by inflation.

Household final consumption expenditure (HHFCE) or household spending grew by 0.1% between Quarter 1 2017 and Quarter 2 2017. This was the lowest HHFCE quarterly growth figure since Quarter 4 (Oct to Dec) 2014 and is in line with a wider narrative of a deterioration of the economic position of consumers in the start of 2017.

"It is worth noting that the slowdown in household spending was partly driven by a fall in spending on cars, which probably reflected shifting purchases to beat the change in VED earlier this year," says Paul Hollingsworth, an economist at Capital Economics which suggests that the impact on GDP might be temporary.

VED is the vehicle excise duty levied by the U.K. government against vehicles driven on public roads.

There were broad changes to the tax rates for diesel vehicles that came into effect in April, the beginning of the second quarter, which had an adverse effect on the volume of car sales in the U.K. according to the Society of Motor Manufacturers & Traders. 

The VED changes resulted in many consumers pulling their planned car purchases forward into the first quarter. 

In addition, although the headline numbers for business investment were poor, surveys of future intentions suggest the current stagnation might prove shortlived.

It is also noted that export orders continue to point to a strengthening in export growth with net trade offering 0% input into growth data, recall in the previous release trade contributed a negative 0.8% drag on growth in Q1.

Elsewhere, government spending, and public investment were fairly strong in Q2.

"Finally, the economy appears to have picked up pace over the course of Q2, with a decent monthly rise in services output in June revealed in today’s figures too. This sets a good base for growth in Q3. As a result, we remain optimistic that a modest acceleration in growth in the second half of the year is in prospect," says Hollingsworth. 

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Sterling has Bigger Issues to Focus on

While the data has boosted Sterling, the outlook remains poor and it will take many more good data releases to lift the Pound.

Looking ahead, we think the Tory Party conference could be the biggest driver of the poound this Autumn," says Brooks at City Index. 

The Pound has been under the cosh during the last week, with the Pound to Euro exchange rate falling back to its October “flash-crash” low, beneath the 1.0900 level.

This is while the Pound to Dollar exchange rate has slid back to levels not seen since late June, beneath 1.2800, despite a broad weakening of dollar-based exchange rates.

Renewed weakness of sterling was triggered when U.K. inflation numbers appeared to show upward pressures on consumer prices running out of steam.

This subsequently let some air out of the argument that the Bank of England might soon look to raise interest rates in order to "contain rising inflation".

Stronger than forecast numbers could help engineer a reversal of sterling’s current weakness although, even then, it might not be enough to change the narrative beyond the very short term.

“The underlying negative momentum for GBP is currently strong. As such, GBP could still continue to trade with a moderate negative bias in the coming months ahead of the Tory party conference and key Brexit talks in October,” says Morten Helt, an analyst at Danske Bank.