Wednesday’s release of the preliminary estimate of Q1 GDP has beaten analyst expectations and should go some way in shoring up the British pound's recent strength.
Today's economic growth statistics were always going to be scrutinised moreso than in the past as analysts try to get a feel what effect, if any, the debate around the upcoming EU referendum is having on the real economy.
The 'Stay' campaign, which (unofficially includes the research of the majority of institutional researchers) were warning that the prospect of us breaking from Europe was already being felt in headline data.
A worse-than-expected number would have been greated with glee.
The ONS has reported the economy grew 0.4% on a quarterly basis to the end of March, while the annual rate of growth now stands at 2.1%.
This adds to the final estimate of 2015's Q4 GDP which showed a stronger-than-expected 0.6% q/q print, up from 0.5% at the second estimate. Yes, there is a slowing in activity, but it is by no means dramatic.
Services, the mainstay of the British economy increased by 0.6%, contributing 0.50 percentage points to Quarter 1 GDP growth, this followed an increase of 0.8% in Quarter 4 2015.
There was however a worrying downward contribution (0.05 percentage points) from the production industries; these industries fell by 0.4%, with mining and quarrying decreasing by 2.2% following the same decrease in Quarter 4 2015 and manufacturing decreasing by 0.4% following a rise of 0.1% in Quarter 4 2015.
There was a downward contribution (0.05 percentage points) from construction; this industry fell by 0.9%.
This follows an increase of 0.3% in Quarter 4 2015.
The ONS release continues to betray an intensification of underlying imbalances – in particular the current account deficit rose to a record 7% of GDP, while the savings ratio fell to an all-time low of 3.8%.
“Both developments suggest that this pace of activity is unsustainable. Moreover, survey and official data since the New Year indicate that the jump in anxieties about the global outlook and associated financial market volatility have pressed on Q1 momentum,” says Michael Sawicki, economist at Lloyds Bank.
The gaping current account gap is the single most important economic risk for the British pound when it comes to the EU referendum debate. Indeed, it is this that could see the pound to euro rate potentially hit parity some argue.
The UK is importing more than it is exporting creating the perfect conditions for a weaker currency. If it weren’t for foreign investment flows the pound would be lower - and these inflows could dry up in the aftermath of a vote to leave Europe.
We would however caution that this would only likely be a temporary impact.
Reactions to the Growth Data
- Daniel Vernazza at UniCredit:
"Looking ahead, the slowdown is likely to continue into 2Q16 with the referendum on 23 June. If, as we expect, the UK votes to remain in the EU then we would expect the lifting of uncertainty to result in a slight pick-up in quarterly growth rates towards historical averages of 0.5%-0.6% qoq in the second half of the year.
"If, however, the UK votes to leave the EU then the UK economy is more likely than not to enter a technical recession within two years."
- Ruth Miller at Capital Economics:
“As had been expected, today’s GDP figures confirmed that the economic recovery cooled in Q1, but we think that this should only be temporary and that growth will regain some pace later this year. Quarterly GDP growth slowed to below the economy’s potential growth rate – from 0.6% in Q4 to 0.4% in Q1 (in line with the consensus estimate).
“As indicated by the monthly data we already had, the industrial production sector exerted a 0.1pp drag on growth, for the second quarter in a row. Meanwhile, the weakening in quarterly growth since Q4 reflected a drop in service sector growth, from 0.8% in Q4 to 0.6% in Q1 as well as a 0.1pp drag from the construction sector.”
- Lloyds Bank:
“That slower growth momentum is likely to undermine the absorption of the economy’s spare capacity in the near term, and as such diminish the upward pressure on domestic costs. Nevertheless, today’s data overall provide few surprises.
“And with the MPC indicating in its April meeting minutes that they are likely to react more cautiously to data news in light of the increased uncertainty, the bar to the MPC taking any cue from today’s number is even higher than normal.”