The final UK
GDP figure has been announced this morning and the news was very good; the UK economy
only contracted by 0.4%, less than than the previous -0.5% estimate and considerably
less than the original -0.7% reading. So in simple terms, the UK economy was
only around half as bad as first thought in Q2. An upward revision to the
construction sector’s performance is a key cause of the upward revision.
The Bank of
England reckons that the extra bank holiday for the Queen’s Jubilee in June cost
the UK economy as much as 0.5%, so underlying growth could actually have been
positive in Q2. There is a big difference between stalling growth and deepening
recession. Today’s upward revision really dovetails with what Mervyn King has
been saying for the last few months. The figures released by the Office of National
Statistics (the GDP figures) have underestimated UK growth, or at least
overestimated the impact of the Jubilee bank holiday.
UK figures have
been showing some significant improvements this summer, helped by the Olympics,
and MPC member Fisher has commented today that we can expect a “very strong”
GDP reading for Q3. In fact, we are expecting Q3 growth to more than make up
for Q2’s contraction, perhaps showing a reading as high as 0.7%.
Of course, downside
risks should be noted and the UK is a long way from being out of the woods and
free from recession fears. The eurozone debt crisis continues to pose a threat
to our banking system and it is certain that eurozone growth will be more or
less non-existent next year. Nonetheless, this morning’s figure is good news
and October 26 will bring more in the form of a robust preliminary Q3 GDP reading.
All good news for the pound, which has already enjoyed a rally today, trading
above €1.26 and $1.62.
Richard Driver
Currency Analyst
Caxton FX
