UK GDP Preview: Recession headlines could send GBP/USD to new lows – Three scenarios

The UK is still in the European Union – but the preparations for Brexit have already had an impact on the economy. Companies were preparing for Brexit at its original date of March 29th and were busy stockpiling ahead of the event – that never happened.

The result was a solid growth rate of 0.5% in the first quarter, in line with the US and outpacing the euro-zone. 

As the first Brexit deadline came and went, so did the second one – April 12th. And in that month, the economy squeezed by 0.4% – the mirror image of the intense activity that took place in the previous month. May has seen a bounce with a positive 0.3% expansion, and now we finally receive the figures for June and for the full second quarter.

Economists expect a stagnation – 0% quarterly growth – and a slowdown in year on year growth from 1.8% to 1.4%. Mark Carney, Governor of the Bank of England, has also echoed these expectations by saying that the economy has probably remained flat or marginally above or below.

Marginally above or below makes a difference – for politicians, economists and traders alike.

Here are three scenarios: 

1) Stagnation – watch the components

If the economy has stalled as expected, politicians and the press may be worried, but the focus will likely shift back to the latest Brexit developments. 

For traders, the reaction in GBP/USD will likely be limited, but the details may play a significant role. Manufacturing production is expected to have dropped by 0.1% in June after a leap of 1.4% in May. Any deviation may move the pound.

Another factor to watch is the change in investment. The BOE has expressed concern about its downfall – caused by Brexit uncertainty. A bump-up may boost the pound while another fall may weigh on it.

2) Ongoing growth – GBP/USD may rise

If the economy has grown by 0.1% on a quarterly basis, it will fuel Boris Johnson's optimistic message about the economy and his "can do" approach. Politicians may celebrate and the media may calm its alarms.

For traders, it offers an opportunity to buy the pound in a counter-trend move. Sterling has suffered in the past few weeks by falling to the lowest levels since January 2017 – and the recovery has been weak. An upbeat figure may allow for more gains.

3) Contraction – Recession headlines may weigh

The post-stockpiling squeeze and ongoing uncertainty may have resulted in a smaller economy. The technical definition of a recession is two consecutive quarters of contraction. And a contraction in one quarter opens the door to another one – and to recession fears. The British press may warn about a downturn and pressure on politicians will mount.

For cable traders, such headlines may exacerbate the disappointment and push GBP/USD to new lows. This scenario cannot be ruled out as June – the month that we do not have a monthly GDP read for – has been full of uncertainty. Back then, Boris Johnson was campaigning and promised Brexit by October 31st – "do or die". Fears of a no-deal Brexit may have weighed on the economy. 

Conclusion

The UK economy has significantly slowed down in the second quarter with equal chances of stagnation, minimal growth, and contraction – the latter option opening the door to a recession. A difference of 0.1% may have a substantial impact on GBP/USD.