Is the UK the new sick man of Europe?

UK growth was actually weaker than expected last quarter, rising by a mere 0.2% on a quarterly basis, down from 0.3%. This drags the annual rate down to 2% from 2.1%. The UK is now beginning to look like the sick man of Europe with strong GDP figures for Q1 from Spain this morning, where GDP rose 0.8% on the quarter and 3% on an annualised basis, overall Eurozone growth expanded by a 0.5% rate over the first three months’ of the year.

Trade weighs down UK growth figure

Weakness in UK growth was mostly centred in trade, exports were downwardly revised to -1.6%, from 0.5% initially, while imports surged by 2.7%. This suggests that the rebalancing away from the consumer is not happening, and the UK’s exporters have not been able to capitalise on the massive 20% devaluation in sterling last year. If the export industry can’t benefit from such a large currency boon, then the sector looks fairly doomed to me.

Some green shoots for business investment

But it wasn’t all bad news. On the bright side, there were some important upward revisions to the GDP report, notably the pick-up in business investment, which jumped by 0.6% in the first quarter after falling 0.9% in the last three months of 2016. Capital spending also rose by 1.2%, which was also revised higher from -0.2% initially. Private consumption was unrevised at 0.3%, and the index of services was revised higher to 0.2% from flat.
This could be a warning sign for Theresa May. If she can’t get a good Brexit deal that protects UK businesses then the UK economy could suffer as other sectors’ of our economy, like exporters and manufacturers, are not strong enough yet to pick up the slack and drive UK growth.

So, is the UK the sick man of Europe? This growth data isn’t encouraging at the early stage of the Brexit negotiations, however, the fact that the US suffered the same fate and is expected to bounce back later this year is also encouraging and the UK data may follow suit. Added to that, UK corporate earnings for Q1 were strong and beat expectations, thus, if the hard data can follow the corporate data higher then we the weakness in the first quarter GDP could be seen as a slip. At this stage it is too early to call the UK the sick man of Europe, however, another quarter of weak numbers could justify this title.

Why this may not derail GBP/USD on its way above 1.30

The market reaction to this report was muted. A second reading of UK GDP doesn’t tend to set the markets alight. The FTSE is mostly flat on the day, there is hesitancy ahead of the Opec meeting later today, and European stocks are not following the US market higher, the S&P 500 made another record close on Wednesday.

The pound is hovering around the 1.30 level, although it backed off highs at 1.3015 ahead of the report. We continue to think that the pound could creep higher, after the market slashed their short bets on the pound for yet another week last week. There could also be further upside after momentum indicators backed away from overbought levels, suggesting that there could be room for further sterling upside from a technical perspective.