Now there’s no doubt that the people of the UK are welcoming with open arms the extra bank holiday that will be part of the Queen’s Jubilee celebrations. However, if we take the similar example of last year’s Royal Wedding, then we can expect a significant hit to the UK economy.
It is estimated that the Royal Wedding in 2011 weighed on the UK’s gross domestic product (growth) by 0.4%. An extra bank holiday means businesses are closed for longer - economic activity is reduced. Of course, there is likely to be increased spending on the high street and a boost to industries such as leisure and hospitality. This will certainly compensate for some of the impact on UK growth, but not all of it.
The Jubilee looks set to weigh on growth by 0.3 - 0.6% again this year, which is the last thing that the UK’s struggling economy needs right now. Data last week confirmed that not only did the UK economy contract for a second consecutive quarter but by even more than expected (-0.3% q/q). With the Jubilee set to constrain quarterly growth which was only ever likely to be flat at best, we can expect third consecutive quarter of negative growth.
What does this mean for sterling? Well, it won’t necessarily hurt sterling. After all, last week saw the release of some awful UK retail sales growth data, some much weaker domestic inflation data and a downward revision to the Q1 UK GDP figure. Regardless, sterling performed strongly, thanks to the ongoing focus on all things eurozone and the risk averse, sterling-friendly trading conditions this is creating.
Of course the risk remains that more negative growth will convince the MPC that more quantitative easing is necessary, but as yet the majority of the nine policymakers seem happy to let the last round of QE to feed through, particularly with medium-term UK inflation risks well-balanced and present inflation levels still elevated.
One common ‘silver-lining’ lining argument is that while the Jubilee may hurt Q2, the London Olympics are only just around the corner in Q3. Estimates have surfaced that the spending linked to the Olympics will boost UK GDP by 0.5%. We approach these predictions with a great deal of caution though, as do the Bank of England, since the impact and success of mega-events such as the Olympics are highly unpredictable. Sydney 2000 boosted Australia’s economy considerably, while Athens 2004 left the Greek economy crippled.
We maintain a positive view for sterling this year, except against the US dollar, regardless of stagnant/negative growth. Clearly the caveat here is that the picture may change if growth is so poor that the BoE pull the trigger on more QE – a major downside risk for sterling. Looking at the limited impact of the last round of QE on sterling though, there is a good chance sterling will hold up firmly again.
Richard Driver
Analyst – Caxton FX
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