UK GDP: the calm before the storm?

<p>Price action has been fairly muted in the equity market in the first half of Wednesday’s session as markets digest positive Lloyds earnings data, a […]</p>

Price action has been fairly muted in the equity market in the first half of Wednesday’s session as markets digest positive Lloyds earnings data, a strong German IFO and a mixed bag for UK GDP data. French election risks are also on investors’ radars, as the markets react to daily changes in the polls and the chances of far right candidate Le Pen winning in May.

Digesting GDP: an economy on the up before the fall?

UK GDP was generally strong, the quarterly data was upgraded to 0.7% from 0.6%, while the annual rate was actually revised down to 2% from 2.2%, knocking the UK off the top of the G7 2016 growth charts, that crown now passes to Germany. In fairness, the downward revision in the annual rate was largely due to oil and gas production in the North Sea, which is an industry-specific factor, rather than a broader sign for the overall economy. Although the UK did well in 2016, there are some worrying signs that could impact growth in 2017.

The chief concern is business investment, which fell 1% on the quarter and was down 0.9% as a whole for 2016. This is a concern, as future growth is dependent on strong investment, if businesses are already holding off spending before Article 50 has even been triggered.  It’s not unreasonable to think that investment could decline further, especially if there are bumps along the road of the UK’s Brexit process, thus, 2016’s decline could be the start of a worrying trend.

Could the recovery in the pound hurt UK’s trade prospects?

The good news included in the UK GDP report was the boost to exports, growth was revised up to 4.1%, compared Q3 exports shrunk 2.6%, suggesting that the weak pound is finally providing a boost to UK trade. The good news may end there, as the pound is starting to get its mojo back vs. the euro, and EUR/GBP fell through its key 200-day moving average support level earlier this week. Since the EU is our biggest trading partner, a rising pound could now be bad thing, so watch this space.

Lloyds a bright spot in some bleak UK banking earnings

Elsewhere, Lloyds beat analyst earnings estimates and even raised the prospect of a dividend payment. The bank, which is soon to be free of government ownership, was a bright spot in some weak banking earnings elsewhere, and questions about the profitability of the UK (and Europe’s) banking sector are likely to swirl for some time.

Watch out for Fed minutes later, get our preview here:

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.