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The Pound Extends Losses After Business Investment Falls - Economic Growth Steady

Slower growth comes as Sterling's fall bleeds its way into economic data. Its effect has been to raise inflation, reducing the “real” value of spending and output.

The Pound extended earlier losses Thursday as traders looked through the latest GDP figures, confirming a small pickup in growth during the third-quarter, to focus on a steeper than expected fall in business investment.

UK GDP grew at a rate of 0.4% during the third quarter, according to Office for National Statistics data released Thursday, which was in line with economist forecasts.

However, business investment growth slowed from 0.5% in the second quarter, to just 0.2% in the three months to the end of September, missing the economist consensus for growth of 0.3%.

"The weakness in annual business investment growth partly reflects a downward contribution from transport, which saw a big rise last year," says Paul Hollingsworth, a senior economist at Capital Economics.

Public and private investment in residential and commercial property were the key sources of growth in business investment.

"With surveys of investment intentions remaining robust despite Brexit uncertainty, and the business surveys pointing to GDP growth perhaps even picking up a little bit of pace in Q4, we continue to think that growth will come in a bit stronger than most think next year," adds Hollingsworth.

The services sector was the dominant driver of broader economic growth, although much of this came through a pickup in the pace of consumer spending during the period, according to the ONS and independent economists. 

Above: ONS chart showing quarterly GDP gowth over dating back to 2004.

"Indeed, we think GDP growth could be around 2%, rather than the 1.4% that the OBR and the consensus expect," Hollingsworth notes.

The Pound was quoted 0.06% lower against the Dollar shortly after the release, making for a Pound-to-Dollar rate of 1.3306. The Pound-to-Euro rate was marked 0.30% lower at 1.1234.

Pound-to-Dollar rate shown at hourly intervals. Captures Wednesday and Thursday trading.

"While the short-term risks to demand since the Brexit vote have not materialised in a serious way, the UK economy should be riding high on the back of the on-going global upswing," says Kallum Pickering, a senior economist at Berenberg. "Uncertainty from Brexit is weighing on firm and household confidence."

A strong upturn in global growth has helped to lift economic activity across Europe, with the German economy shown Thursday to have expanded at a rate of 2.3% in the third quarter, close to its fastest pace of growth since 2011.

"After managing one of the strongest post-Lehman recoveries of all advanced economies, the UK growth rate would probably be nearer 2.5% this year if it weren’t for Brexit," says Pickering. "Further out, we expect real GDP to expand by 1.6% in 2018 and 1.7% in 2019, above the market consensus of 1.4% and 1.6%, respectively."

After spending many of the years since the debt crisis of 2011 caught in a mire of low growth and uncertainty over the future, the broader Eurozone is also expected to see an acceleration in growth for 2017, with GDP forecast to expand by 2.3%.

This will leave the UK economy at the bottom of the class of advance economies in Europe and elsewhere.

"Having broken above 1.33, GBP/USD appears poised for a move higher but sterling bulls need to be careful as all is not clear until GBP/USD breaks 1.3350," says Kathy Lien, managing director of foreign exchange strategy at BK Asset Management.

The slowdown comes as the double digit fall seen in the value of the Pound since the Brexit referendum bleeds its way into the hard economic data. Its primary effect has been to raise inflation, which reduces the “real” value of consumer spending and economic output, leading to a fall in “real GDP”.

“The Chancellor managed to produce a fiscal giveaway amounting to almost £10bn p.a. in 2019-2020, despite some even bigger-than expected downward revisions to the Office for Budget Responsibility’s (OBR) forecasts for productivity and GDP growth,” says McLaughlin.

Thursday’s GDP number comes closely on the heels of the autumn budget statement from the Chancellor and the latest round of economic forecasts from the Office for Budget Responsibility.

“The key components include extra spending on the NHS, the abolition of stamp duty for first time buyers, increased spending for Brexit preparations, the freezing of most excise duties, extra spending on homebuilding and changes to the universal credit system,” says Finn McLaughlin, an economist at Capital Economics.

Despite the additional spending, the government is still set to meet its target of reducing the budget deficit to 2% of GDP or below by the time 2021 comes around.

"The net effect of the changes has been to ease back on the pace of austerity over the coming years, with the fiscal stance now tightening by less than 0.5% of GDP next year and even less in the outer years of the forecast," says Jonathan Loynes, chief economist at Capital Economics.

The OBR cut its forecasts for UK economic growth to 1.5% for 2017, down from 2% at the last forecast round in March, and now expects the economy to grow by just 1.4% on average in the years out till 2021.

Productivity growth forecasts also came in for the chop Wednesday, which bodes ill for those hoping to see a pickup in wages.

“And if we are right in thinking that the OBR has now become too gloomy about productivity and growth prospects, this could give the Chancellor rather more elbow room in the coming years than the current projections suggest,” adds Loynes.

With budget giveaways aside, economy-watchers may have found Thursday’s flurry of statements made for grim reading, although some see the latest forecasts as ering too much toward the pessimistic side.

“It is possible that, after consistently overestimating the UK’s growth prospects in the past, the OBR have gone a little too far with the downgrades this time around,” says Berenberg's Pickering. 

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