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    Pound firmer after UK growth picks up pace in Q4

    The preliminary estimates of UK GDP growth showed the British economy expanded by 0.5% in the fourth quarter of 2015 compared to the previous quarter. The figure is in line with consensus estimates and is an improvement on the third quarter’s 0.4% rate. After disappointing growth for much of the year, today’s data should disperse fears that the UK was heading for a sharper slowdown.

    However, looking at the year-on-year rate, growth was 1.9% in the fourth quarter – the slowest since the first quarter of 2013. Full year growth in 2015 came in at 2.2%, confirming the weaker performance compared to 2014 when the economy grew by a more robust 2.9%.

    Helping the pick-up in growth was faster expansion in the services sector, which grew by 0.7% quarter-on-quarter and was the sector’s best performance in a year. Strong growth of 0.9% in business services and finance led the output in services during the quarter.

    The production sector once again underperformed, declining by 0.2% over the quarter. This was the first negative quarterly growth in industrial output since 2012. There was a 1.4% drop in mining and quarrying production as the slump in oil prices is impacting North Sea oil production, which is costly in comparison to the larger producers such as Saudi Arabia and Russia. Manufacturing production managed to escape a contraction though and output was flat over the quarter.

    The construction sector shrank for the second quarter in-a-row, with output falling by 0.1% quarter-on-quarter. But agriculture almost matched the services sector with 0.6% growth.

    The UK economy is not expected to return to above-trend growth anytime soon with GDP forecast to expand by 2.3% in both 2016 and 2017. The slowdown in China, sluggish growth in the Eurozone and lower oil prices are likely to weigh on UK exports. Weaker growth, easing wage pressures and cheaper fuel prices has led the Bank of England to push back its expectations of raising interest rates with consensus forecasts predicting the first hike to come in the fourth quarter of 2016. Money markets are expecting rates to go up even later in November 2017.

    The revised outlook has put pressure on sterling, which has depreciated significantly since November 2015. But the pound moved higher today after the data as markets were relieved that the GDP figures did not disappoint. Cable jumped by 0.6% to 1.4345 before easing slightly to 1.4314 in mid-European session, while the euro was weaker at 0.7620 pounds.

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