The stunning 1% increase in GDP for the third quarter saw the UK exit its first double-dip recession in style. The market had expected a 0.6% increase, up from the 0.4% contraction in the second quarter.
But the 1% expansion in Q3 GDP may not reflect the underlying growth rate in the economy due to some special factors that could have boosted growth last quarter:
1, The one extra working day in Q3 compared to Q2 due to the Queen’s Diamond Jubilee bank holiday.
2, The Olympics and Paralympics
The ONS has said that the impact of the Jubilee holiday on the economy is not possible to quantify at this stage, however it will carry out retrospective analysis, which suggests that there could be further revisions to Q2/ Q3 data down the line.
The impact of the Olympics and Paralympics is slightly more quantifiable. Ticket sales were estimated to have had a 0.2% increase on GDP. Although tickets were sold in tranches for the Games between 2011 and 2012, the national accounts allocate them to the third quarter when the tickets were actually used. The ONS also noticed positive impacts on employment, the arts and entertainment sector, higher hotel occupancy rates in London over the period of the Games and strength in the food and drink sector. In sectors like office administration and retail sales the impact of the Olympics was more mixed, for example online retail sales were seen to be negatively affected as people watched the Games rather than purchased goods on the internet.
The ONS said that it was not possible to measure the full effect of the Olympics on the economy at this stage. The ONS has already started its economic analysis of the Games and we should hear more about the impact in the coming months.
Q3 GDP: the detail
There were broad-based gains in the construction, industrial and service sectors, rising by 2.5%. 1.1% and 1.3% respectively between Q3 2011 and Q3 2012. However, in volume terms GDP was flat in Q3 2012 when compared with Q3 2011. This highlights the low base for Q3 growth to bounce off after the weak economic data in the first half of the year.
There were gains for the transport sector and business services, the government also did its bit to help boost the service sector. Its contribution to the economy was estimated as 1.6% in Q3, after an increase of 0.3% in Q2. This helped negate the effect of weakness in the mining and agriculture sectors.
Can the UK keep growing?
The bar has been raised for Q4 and we are unlikely to get such a stunning rate in the last 4 months of the year. Big event risks could also impact output including the fiscal cliff in the US and continued weakness in the Eurozone, the UK’s largest trade partner. However, to balance this falling inflation may boost consumption for the rest of this year especially as we enter holiday season.
We believe the underlying pace of growth is weaker than the headline figure suggests for Q3 and once you strip out the exceptional items then growth could be more like 0.3-0.4%. This is better than Q1 and Q2, but it is still a fairly low rate of growth.
If external threats do not come to pass then we could see the UK register more “normal” growth in the coming three months – not too hot, nor too cold.
The impact on sterling:
Some of the good news was already baked into the pound in the run-up to this data courtesy of David Cameron who said that there was good news to come on the UK economy at yesterday’s PMQ’s. This limited the upside once the data was released as the markets expected David Cameron to know what he was talking about, especially as he sees the data 24 hours before it is released.
GBPUSD popped above 1.6100 on the news, but it is meeting resistance at 1.6130. We tend to think that better GDP combined with a benign economic environment may cause the pound to extend gains to 1.6200 and even 1.6260 in the next week or so. This level thwarted the bulls back in September, and we don’t think the better Q3 GDP data will be enough to fuel gains back towards 1.6300 in the medium-term.
The GDP surprise and QE in November:
We believe that the better than expected GDP data makes more QE in November less likely. The market had been expecting the BOE to increase its asset purchases next month, so this may boost sterling further in the coming weeks. However, we believe we will need to see sustained upbeat economic data in the coming months in order for GBPUSD to break above 1.6300. Already the October industrial data is starting to show signs of weakness, the CBI industrial trends survey fell to -25 from -8 in September.
It will also be interesting to see the BOE’s view on whether the funding for lending scheme has contributed to stronger growth rates and also if it believes it could help growth in the fourth quarter.
GBP and interest rate differentials:
GBPUSD and US 10-year yields and GB 10-year yields.
Cable has jumped ahead of the rate differential between UK and US yields. This spread is still in positive territory, but for us to see a move above 1.63 in GBPUSD we may need to see this spread break above the top of its recent range.
EURGBP and German 10-year yield – UK 10-year yield spread
We could see a more sustained decline in this cross as the relative growth rates (the UK is strong, Europe is deteriorating) causes the spread to move in GBPs favour. Support lies at 0.8060 – the 21-day sma, below here opens the way for a decline to 0.7950 in the medium term – the low from early October.