UK growth unexpectedly contracts; GBPUSD revisits sub $1.21

Summary:

  • UK 2nd quarter GDP Q/Q: -0.2% vs 0.0% exp. +0.5% prior 

  • 1st negative reading in 6 years

  • GBPUSD revisits recent lows below $1.21

 

The latest look at the UK economy makes for pretty grim viewing with a contraction of 0.2% seen in the second quarter. This marks the first time in over 6 years that we’ve had a quarterly contraction in economic activity and given the growing threat of a no-deal Brexit that looms menacingly overhead, it would not be at all surprising if the current quarter also shows a contraction - therefore meeting the standard definition of a recession with consecutive drops in quarterly GDP.  

UK GDP in annualised terms fell close to its lowest level since 2010 at 1.2% according to the latest release. A sharp drop in inventories, likely due to unwinding Brexit stockpiling in Q1 the chief cause of the drop. Source: XTB Macrobond 

 

The solid 1st quarter growth of 0.5% owes a lot to companies stockpiling ahead of the 29th March Brexit deadline that never came and it's pretty obvious that economic activity is clearly slowing. The pound has had a fairly quiet week with reports on Thursday that Boris Johnson is plotting an election in the days after leaving the EU on 31st October keeping any hopes of a recovery firmly in check for now.

 

Industrial and manufacturing production also both fell, with several indicators pointing to a slowdown in the UK economy. Source: XTB Macrobond

 

The currency fell to its lowest level in over 2 years against the Euro in recent trade and while the GBP/USD is just about holding above the recent lows, the market continues to languish not far from the post Brexit referendum low around $1.20. After tumbling on Monday and falling further on Tuesday, UK stocks have staged something of a recovery with the FTSE attempting to make it 3 consecutive daily gains into the weekend.  

GBPUSD remains in a narrow range around the $1.21 handle and not far from the lowest level since the 2016 referendum. Source: xStation 

 

 

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