Pound-Dollar Rate Slips in Wake of Disappointing UK Economic Growth Figures for May

- GBP dips in wake of economic data release
- UK economic growth is slowing
- Economists say Covid surge is to blame

UK economic growth rebound

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  • GBP/USD reference rates at publication:
  • Spot: 1.3766
  • Bank transfers (indicative guide): 1.3380-1.3480
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The UK economy grew 24.6% in the year to May, an impressive headline figure flattered by the economic crash a year earlier but one that nonetheless is softer than the 25.9% the market had been expecting.

The disappointment triggered some weakness in Pound exchange rates with the Pound-to-Dollar exchange rate (GBP/USD) dipping to a low of 1.3765 in the minutes following the release, with economists saying the disappointment can be attributed to rising Covid-19 cases in the country.

In the month to May growth registered at 0.8%, which is nearly half the 1.5% forecast. The three month average GDP growth in May stood at 3.6%, which is lower than the 3.9% the market was expecting.

In fact, all the data dumped by the ONS this Friday has disappointed, confirming that the UK's economic growth rebound is starting to disappoint against expectations.

For foreign exchange markets this is potentially significant given currencies are trading in a regime that places heightened emphasis on economic growth differentials and central bank monetary policy.

Indeed, the Pound did fall in the minutes following the release:

Pound to Dollar rate falls

Looking at the various other ONS numbers, industrial production for May read at 20.6% which is below the 21.6% the market was expecting.

Manufacturing production for May read at 27.7%, below the 29.5% forecast.

According to the ONS the UK economy remains 3.1% below its pre-pandemic level:

UK economic growth ONS

"May's GDP report is a bit a cold shower for those expecting it to return to its peak in Q3," says Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.

"Outside hospitality, little momentum. Rising Covid cases point to slower growth in June," he adds.

Economists tracking weekly data releases have noted a distinct slowdown in growth rates over recent weeks and many are attributing the development to the rise of Covid-19 cases in the UK.

The UK is currently experiencing a third wave of infections with 32500 new cases being reported on July 08. 

Rising cases means more of the productive workforce are being asked to self-isolate through the contact tracing system while it also bears down on consumer and business confidence.

"The UK economy has had a great second quarter, but rising Covid-19 cases threaten to press the pause button on the recovery over the summer," says James Smith, Developed Markets Economist at ING Bank.

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"The muted increase in GDP in May is especially disappointing at a time when some more timely indicators suggest that the economic recovery lost a bit more verve in June. This may mean that the recent rise in COVID-19 cases and the delay to the final easing in COVID-19 restrictions is hampering the recovery," says Paul Dales, Chief UK Economist at Capital Economics.

Pound Sterling Live reported this week that foreign exchange strategists at Deutsche Bank were adopting a more cautious stance on the Pound over coming weeks as they expect the rise in Covid-19 cases to cast a shadow over the UK's economic recovery. 

An assessment made by Deutsche Bank finds that rising Covid-19 cases in the UK could have a negative impact on consumer confidence over coming weeks, which in turn will weigh on spending and ultimately economic activity.

"We are more concerned that any minor direct boost from the July 19th reopening will be offset by indirect ripple effects of the exit wave, with issues on both the demand and supply side," says Shreyas Gopal, Strategist at Deutsche Bank.

"There is a link between rising case rates and consumer confidence, despite vaccinations being well understood to greatly reduce the chance of severe illness," says Gopal.

Gopal Covid cases

Above: "UK consumer spending steady but not 'gangbusters' as Covid cases rise" - Gopal.

"There’s also a growing risk that consumers begin to ‘act with their feet’ and reduce socialisation again while cases are high. And this may be one contributing factor to the recent levelling off in UK high frequency data. Mobility and spending data have come off recent highs," says Smith. 

Looking ahead, ING expect a positive third quarter growth reading of around 1.5%, especially given it is unlikely that the government will enact new restrictions.

The government earlier in the week committed to fully reopening society on July 19 with a final confirmation likely on Monday.

"We’d still say the outlook beyond the summer looks reasonably good, assuming no significantly vaccine-evasive variants emerge in the near-term," says Smith.

ING forecast the size of the economy to be more-or-less back to pre-virus levels by the end of the year.

Owing to the slowdown in the UK economic recovery Capital Economics say they are now pushing back the point at which the economy returns to its pre-Covid size.

"We hadn’t expected it to slow so much so soon. As such, whereas we previously thought that GDP would return to its pre-crisis peak in August, October now looks a better bet," says Dales.

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