Growth in the UK economy slows in the first quarter
29/Apr/2015 • Currency Updates•
Sterling climbed to a fresh seven week high on the Dollar on Tuesday, despite weak growth figures in the UK, appreciating by 0.6%.
Growth in the UK economy fell short of expectations on Tuesday, with expansion registering just 0.3% in the first three months of the year from Q4. This was well down on the 0.5% forecast, causing the annualised figure to decline to just 2.4%, down on Q4’s 3.0%. A 0.5% increase in the services sector was overshadowed by a 1.6% decreases in construction activity, with industrial output remaining fairly stable, declining by just 0.1%. It is worth noting that the service sector is now the only major part of the economy where output has exceeded is pre-financial crisis peak.
The data marked the slowest rate of expansion in the UK economy since the end of 2012, when there were fears that the country would slide back into recession. While Prime Minister David Cameron was quick to play down the decrease, this will likely weigh on the Conservative election campaign in the coming days. Pound weakness, however, was temporary, with markets perhaps acknowledging the likely upward revision of the preliminary estimate.
Any surprises in the CBI’s distributive trade survey at 11am this morning could lead to volatility in Sterling. Yesterday’s weaker than anticipated growth figures may also shrink the conservatives lead in today’s election polls.
More Dollar weakness caused the single currency to soar by 1.2% versus the Greenback yesterday.
A lack of data releases in the Euro-area meant all attention in Europe was on Greece yesterday. There was a sense of optimism after Prime Minister Alexis Tsipras claimed Athens could reach an agreement with its creditors by the end of next week. Tsipras claimed a deal was “close”, with many analysts now pencilling in 9th May as a crunch day for the country. Meanwhile, speculation surrounding a Greek referendum increased as the Prime Minister suggested that such a solution is now officially on the table. Fears of a Greek exit have undoubtedly increased in the past few weeks, with a regular survey from Sentix released yesterday suggesting that 49% of investors now expect Greece to leave the Eurozone in the next 12 months, compared to 36.8% a month previous.
There are a number of smaller data announcements in the Eurozone economy this morning, including the release of the economic bulletin from the European Central Bank’s April meeting at 10am London time.
Another poor day’s trading for the Dollar saw the US Dollar index decline by 0.65%.
Confidence in the US economy unexpectedly declined to a four month low as American’s views of the labour market and outlook of the economy deteriorated this month. The Conference Board’s index dipped from a revised 101.4 to just 95.2, much lower than estimates. The recent large drop in gasoline prices has stabilised of late, causing prices to edge up marginally, while bad winter weather and labour disputes at West Coast ports are all likely to have weighed on the economy in the first quarter of the year.
In other news, home prices in the US rose more than expected in February according to the latest S&P/Case-Shiller home price index. Compared with a month previous, prices climbed by 0.9% and by 5% on an annualised basis in February. The index has now seen 34 consecutive months with positive year-on-year gains.
Today will mark a key day of releases in the US, with growth figures at 1.30pm and Federal Reserve meeting at 7pm carrying the most risk for markets. Growth in the first quarter is expected to slow to around 1%, although even these expectations may be slightly optimistic. The Federal Reserve statement is likely to be more neutral than usual, however, any mention of the recent slump in data being temporary may indicate to markets that the central bank is ready to hike interest rates soon.