UK GDP Preview: Negative surprise set to dethrone Sterling from recent highs

Mario Blascak, PhD Independent Analyst

The UK economy proved to be very resilient in the immediate aftermath of the Brexit referendum in June 2016, surprising the central expectations at the time. Nevertheless, some of the aggregate output is gone for good in 2017, especially as Sterling´s depreciation fed into higher inflation that has been weighing on consumer spending and the UK trade balance improving but still dwelling within deficit territory.

The outlook for the UK growth remains rather muted for the Bank of England that sees the UK economy operating at its full potential output driven by the labor market tightness rather than the productivity improvement. This is leaving the potential output vulnerable to swings of the labor market condition, especially in light of Brexit related uncertainty. In fact, the UK economy was the only major G7 economy to experience the growth outlook downgrade in the latest issue of the World Economic Outlook from the International Monetary Fund published this Monday.

The IMF now expects the UK economy to grow by 1.5% y/y in both 2018 and 2019, down 0.1% from the previous forecast for 2019.

The most worrying sign for the UK economic growth driven by household consumption is the drop in the retail sales during the final quarter of 2017. With the inflation having a greater dynamics than nominal wage growth, the real, inflation-adjusted wages are negative weighing on the UK consumers.

A sign of real wages cutting back spending was documented by the UK retail sales report for December that slumped 1.5% m/m and after motor fuel sales adjustment even greater 1.6% over the month. The Office for National Statistics noted that the contribution of retail sales to GDP growth in the final quarter last year was almost nothing.

Although the net position of the UK government finances improved massively recording best figures in last decade, the weight of government spending is unlikely to compensate for the lost expenditure of households that in case of the UK stand behind two-thirds of the economic growth.

To sum up, the UK GDP is expected to rise 0.4% over the quarter in Q4 2017 with annual growth rate decelerating to 1.5% y/y from 1.7% y/y for the previous quarter. With negative trends in both the UK retail sales and foreign trade being uncertain, the probability of negative surprise is likely to dethrone Sterling from its recent post-Brexit highs.

Author

Mario Blascak, PhD

Independent Analyst

Dr. Mário Blaščák worked in professional finance and banking for 15 years before moving to journalism. While working for Austrian and German banks, he specialized in covering markets and macroeconomics.

GBP/USD bounces off lows, back above 1.3200

After bottoming out near 1.3160, GBP/USD manages to regain a bit of shine and reclaim the 1.3200 mark and beyond at the end of the week. Stronger-than-expected UK Retail Sales data seem to be helping the British Pound limit its losses, while the chaotic UK political environment keeps the bulls at bay for now.

EUR/USD looks consolidative around 1.1460

EUR/USD stages a modest rebound after slipping to a three-month low below 1.1420 at the end of the week. That said, the pair now looks to consolidate humble gains just above 1.1460 despite growing uncertainty surrounding the next round of US-Iran negotiations, which keeps the US Dollar’s downside contained.

Gold slips back to six-day lows, targets $4,100

Gold retreats for the third consecutive day on Friday, eroding gains seen in the first half of the week and approaching the key $4,100 mark per troy ounce. Indeed, the precious metal continues to face headwinds from the Fed's hawkish stance and renewed uncertainty surrounding the next round of US-Iran negotiations.

Breaking: Iran closes the Strait of Hormuz amid ceasefire deal violation

Iran says it is closing the Strait of Hormuz after accusing the United States (US) and Israel of violating the ceasefire. According to Iran, the decision came over the continued Israeli strikes in Lebanon. The Iranian Revolutionary Guard Corps Navy issued a warning to all vessels: "Do not approach the Strait of Hormuz; otherwise, your security will be jeopardized."

The Iran war didn't break the US economy, but what happens next?

Nearly four months after the start of the Iran war, the US economy remains remarkably resilient. While the conflict initially triggered a severe disruption to global energy markets and a sharp rise in Oil prices, recent diplomatic progress between Washington and Tehran has eased concerns about a prolonged supply shock.

Regime change: Inside Kevin Warsh's first move to make the Fed unreadable on purpose

The rate did not move. That was the least interesting thing about Kevin Warsh's first meeting in charge of the Fed. The FOMC held its benchmark at 3.50%-3.75% for the fourth straight meeting, exactly as priced, and then the new chair used his first press conference to dismantle the machinery the market has leaned on for a decade.