XM Group - Analytics

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    Pound gains on UK GDP rebound in Q2

    The UK economy expanded by 0.7% in the second quarter of the year from the first quarter, in-line with estimates. The strong figures show that the UK economy has regained momentum after a mild slowdown in the first quarter of the year when GDP expanded by just 0.4%. Compared to the same quarter in the previous year, GDP was up by 2.6%, also in-line with estimates.

    Britain’s dominant service sector grew by 0.7% from the previous quarter as business and financial services recovered from a stagnant first quarter, expanding by 0.8%. Transport, distribution and hotels also performed well but the government sector unsurprisingly grew by just 0.1% due to public sector cuts.

    The biggest turnaround came from production industries, which after a modest 0.2% growth in the first quarter, jumped by 1% in the second quarter, the highest figure since 2010. The strongest growth came from mining and quarrying, which saw output surging by 7.8% over the quarter. Water supply and sewerage also performed well with 4.8% growth. But manufacturing continued to struggle and contracted by 0.3% over the quarter. Agriculture and electricity & gas also fared poorly and shrank from the previous quarter.

    Construction output, which recently saw big upward revisions to previous quarters’ data, was unchanged from the previous quarter.

    Although initial estimates are subject to large revisions, there is little concern that the UK’s consumer driven economy is about to slow down anytime soon. With unemployment falling, wages rising and inflation running at historically low levels, British consumers are set to continue spending. This may pose a challenge for the Bank of England as the recovery in manufacturing has lagged the service sector. The surge in mining and quarrying output is unlikely to provide permanent support to the production industries as the sector was boosted by the highly volatile North Sea oil and gas production. The stronger pound also makes the job of rebalancing the UK economy tougher as manufacturers have started to report weaker orders in recent months.

    However, markets expect the Bank of England will focus on the pace of wage growth and the Governor, Mark Carney, has repeatedly signalled that interest rates could go up as early as the end of 2015/beginning of 2016. The pound jumped against the dollar and the euro after the data came out as it affirmed the current outlook on UK rates and growth. Cable reached a high of 1.5617 before easing to 1.5595 by mid-European session. The euro meanwhile continued to slide against the pound, dropping to 0.7073.

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