UK: Q3 growth above expectations but still a Brexit recession likely - Wells Fargo

Today’s GDP growth data from the UK showed a positive 0.5% q/q rate, above expectations. According to analysts from Wells Fargo, it represents a slowdown but not as bad as expected. They still expect a recession in the UK, a weaker pound and more action from the Bank of England.

Key Quotes: 

“In the immediate aftermath of the Brexit vote, many analysts, including ourselves, expected that the ensuing uncertainty would cause growth in U.K. economic activity to weaken, if not turn negative. This morning, preliminary data on economic growth in Q3 confirmed that activity slowed to a sequential rate of 0.5 percent (2.0 percent on an annualized basis), which represents a modest slowdown from the 0.7 percent rate that was registered in Q2”

“Growth in the third quarter was driven almost entirely by the service sector, which points to strength in consumer spending.”

“Despite robust consumer spending, which has buoyed headline growth in the aftermath of the Brexit referendum, we still expect the U.K. economy to slip into a modest recession in the coming quarters.”

“The Bank of England (BoE) stands by to provide further rate cuts/accommodative monetary policy if the economy looks like it cannot stay afloat on its own. However, given today’s stronger-than-expected GDP print, we now expect the BoE to remain on hold next week and wait until early next year, when signs of a weakening economy surface, before cutting rates.”

“Our currency strategy team believes the pound will remain under pressure and head lower against the dollar over time as the monetary policy stances of the Federal Reserve and the Bank of England diverge.”