On October the 25th preliminary UK´s 3Q GDP was released, showing a +1,0% increase (qoq), breaking a three in a row negative quarters, that allowed GDP to reach a 0,0% yoy rate of growth. But the data was clearly affected by London Olimpic Games celebrated within the period, so, since the most positive point of view we can consider that UK economy has left recession… only to reach a stagnant situation.
British economy, in spite of having a relevant industrial sector (it is historically the first industrialized economy) with a marked bias towards high added-value products (aerospacial and denfense with corporations as BAE Systems and EDAS; chemical and pharma corporations as GlaxoSmithKline and AstraZeneca…) has “suffered” the increasing weight of services in the economy, based mainly on financial and insurance services (the “City” remains as one of the most important financial centers of the world), reaching currently a 75% over total GDP.
A deeper analysis of its current economic situation highlights the doubts about its capacity to keep out from recession. Since the beginning of the last crisis, unemployment rate increased from 2,4% to 4,9%, and after three years it has not been reduced (current 4,8%), causing consumer confidence to crawl towards the same levels than on Lehman´s collapse and also curbing consumer spending (retail sales has kept growing on yoy basis between 0% and +2%).
External sector has also suffered global economic deceleration: exports remains stagnant or slightly contractive, and though imports remained stagnant too, trade balance deficit has reached again pre-crisis levels (-40 billion GBP). Industrial sector contracted for seventeen consecutive months on yoy basis, manufacturing PMI keeps above 50 level and investment component of GDP is unable to grow (+0,3% yoy 2Q12).
Since David Cameron became prime minister, austerity has been the main guidance for fiscal policy, making the budgetary deficit/GDP to lower from -12% (at the end of 2009) to -6,34% (current) and obviously pushing higher debt/GDP ratio to 85% (end of 2011).
From the point of view of monetary policy, Bank of England (BoE) joined, the Federal Reserve and the ECB on implementing quantitative expansion programs. Official interest rate benchmark has kept unchanged on 0,50% since March 2009, at the same time that began its asset purchase program with 75 billion GBP, that was increased to 200 billion at the end of that year, holding steady till October 2011, when euro-periphery debt crisis caused the BoE to fund the program till reaching 375 billion (current since August 2012).
Examining the sterling pound evolution during the last years against euro, immediately after Lehman´s collapse, GBP depreciated against EUR to near parity levels (0,985 GBP/EUR) showing a more relaxed approach to monetary policy of BoE compared with ECB´s one, the high weight of financial sector on its GDP and the diminishing importance of its currency on global economy. After a slow and volatile recovery of pre-Lehman´s levels, renewed concers about debt crisis in the Eurozone, allowed the currency to slowly appreciate against EUR that accelerated after the summer of 2011, when David Cameron got further away from French-german political decisions.
Mario Draghi´s support to euro during last summer, has caused british pound to depreciate against euro since the end of July, and current level is trying to break this movement (upward short term trendline), so we have to think it is on a support level, that in the case of being broken could cause the GBP/EUR to move to 0,77 (probability for this scenario has increased since the price has failed to break downward medium term trendline iniciated in the summer of 2011). But if this support level is observed by the market, we should wait the GBP/EUR to move up to 200-day moving average (0,81 GBP/EUR) and maybe to resistance level created by relative highs of the last weeks on 0,817 GBP/EUR.
