- UK GDP at 3.0% along with expectation
- Contrast to disappointing retail sales
- GBP shows a moderate spike
- Medium term GBPUSD expectations
The GBP has head a moderate Spike to the up side following the release of the Q3 GDP figures. The UK has posted a 3.0% year on year increase in GDP for the third quarter on 2014. This represents a 0.2% decline from form the previous quarter’s growth at 3.2% and a 0.7% growth in the third quarter of 2014 (QoQ).
The lower GDP growth met the markets expectation and therefore the release has had quite a muted effect on the currencies market; the lowered expectations had already been priced in by the majority of the participants. 30 minutes after the release for instance, the GBPUSD has had a 40 pip spike to the upside but found resistance at the 1.607 level. Within that time, the EURGBP has only dipped 150 points and a correction is taking shape.
How is the growth distributed?
Following yesterday’s underwhelming retail sales figures the market has had a dampened sentiment towards the GBP and the current price correction may be accounted by the speculative bears who were taking the view that we would get a lower than anticipated GDP reading for the third quarter. Yesterday at the open of London, the preliminary retail sales for September came at -0.3% (negative 0.3%) representing about a 0.7% fall in the reading from the previous month’s 0.4% increase. Though the market had anticipated a decline to 0.1% (negative 0.1%), the actual reading was well below market prediction.
In Q3 2014 all sectors of the UK’s economy showed an increase in output. The Construction sector had the largest growth at 0.8% whilst agriculture had the least growth in output at 0.3%. The services sector and production had a 0.7% and 0.5% growth respectively.
UK GDP and main components, Q3 2014
The down turn in the GDP growth for Q3 2014 is typical of the period post the 2008 down turn in economic activity; we anticipate future correction in the growth to result in higher growth figures. Since the 2008 crash and the bottoming of growth in the third quarter of 2013, the UK’s GDP has had a much more slowed and erratic growth. Much of this slowed growth has been attributed to external factor such as the weather but predominantly, an air of uncertainty and a reluctance to invest has dominated the real economy.
Putting it all together
A growing GDP can be an encouraging statistic about an economies outlook, however we must examine at how exactly the growth is coming about.
This higher growth figures are great news for the work force in the UK, the unemployment in the UK stands at 6.0% which is the lowest since Q3 2008. In reality though, a close examination of the growth shows that it is only the services sector that has been able to exceed the pre-2008 peek.
The construction and manufacturing sectors have been much more subdued by the woes of 2008 – 2009. However let us keep in mind that the services sector accounts for over 70% of the UK’s GDP. Taking these factors into account, we can easily account for the fall in the unemployment rate in the UK and the consistent positive growth that the economy is posting despite the fact that the production, manufacturing and agriculture sectors of the economy are still below the 2008 levels.
Taking all these factors into consideration, we are of the opinion that the growth shown in the UK, though substantial, needs to permeate well into other sectors of the economy before we can be bullish on the GBP in the long term. We remain cautious about going long on the cable until we have real evidence of economic growth. In the medium term we would not be shocked if the GBPUSD was to Slide below the 1.600 level.
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