Currency Note

UK economic growth hits near two-year high

By Paul Redmond November 12th, 2018

UK economic growth

Good morning. Fridays tend to be pretty good as it is, but when the UK economic growth figures come in at a near two-year high, they get even better. Figures released showed that the UK GDP growth rate for the third quarter 2018 was 1.5%. This was in line with expectations and showed a marked improvement from the 1.2% posted in the previous period. It is the best quarter since the end of 2016.

However, it wasn’t all rosy, as we saw that growth stagnated in September and didn’t post any growth in August either. Economists had expected a small increase of 0.1% so the release was a little disappointing. Unfortunately, we also saw UK business investment hitting its worst run since the financial crisis. Between the second and third quarter of 2018, business investment fell by 1.2%. That’s the sharpest decline since the first quarter of 2016 and is the third consecutive quarterly fall – something that hasn’t happened since the global financial crisis.

The most likely reasons for this is continued Brexit uncertainty which has made companies reluctant to buy new factories and offices until they have more of an idea of the type of Brexit we can expect. The Chancellor of the Exchequer, Philip Hammond, delivered a speech during a trip to Fuller’s Brewery in London, in which he alluded to the quarterly GDP reading of 0.6%. He said that the positive growth is proof of the underlying strength in our economy.

Not everybody agreed, with the CBI saying it fears the UK economy is weakening. Their principal economist, Alpesh Paleja, said that the positive impacts of the warm weather and World Cup will fade in time and the CBI expects subdued growth in the future. Ana Boata, a senior economist at Euler Hermes, weighed in and said she fears growth could halve in the current quarter.

There is nothing on the schedule today, but tomorrow picks up, with the unemployment rate and average earnings for September set for release in the UK. We will also see the German inflation rate for October and the ZEW economic sentiment index for November. The latter release is expected to worsen, from -24.7 to -25.0 as trade war fears continue to have their wicked way with the eurozone’s largest economy.

Last week, the pound had a bit of a bumpy ride and at one point hit $1.3176. However, it fell back toward $1.30 as the week progressed and even sank below that on Friday. So much hinges on Brexit now, that some big moves could be forthcoming in the next few months. In which direction is almost entirely dependent on the sort of deal the UK agrees with EU – if a deal is agreed of course. Strap in, because the next four to five months could be a bit of a rollercoaster.

The drop in sterling’s value that we saw after the EU referendum should highlight how important it is to protect your business from currency volatility. We are not scaremongering – many clients who didn’t act took a significant hit and, while it is true that sterling’s value could soar if we agree the right deal, is it worth taking that chance? Far better to lock in a rate, forget all about Brexit, and concentrate on realising your business growth ambitions.

GBP: UK economic growth hits 1.5% in Q3

The headline release on Friday was the UK GDP growth rate for the third quarter of 2018 which came in as expected at 1.5%. On a quarterly basis, the figure came in at 0.6% from 0.4% the previous period. The readings were positive, but the markets were extremely cautious in response and sterling actually slid against the dollar. The economy stagnated in August and September and there are fears this could bleed through into the final quarter of 2018.

Balance of trade figures in September showed that the deficit decreased by £2.07 billion to post the smallest trade gap since February. Year-on-year industrial production figures were disappointing and came in at 0% when 0.4% had been expected. Month-over-month, the figure was also 0%, but that was better than the -0.1% analysts had predicted. Manufacturing production also came in better than expected at 0.5% when a reading of 0.4% was predicted.

There’s no releases from the UK, eurozone or US today, but tomorrow we will see the unemployment rate, claimant count change and average earnings for September. We could be in for a few surprises, so let’s hope they’re not nasty ones.

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EUR: how has the German economy fared of late?

The highlight from the eurozone last week was the European Commission’s forecasts which predicted there would be a slowdown in growth across the eurozone over the next couple of years. Trade wars, rising geopolitical tensions and higher oil prices are all likely to have a negative impact on growth in the future.

Economic growth predictions showed that the UK will be at the bottom of the growth table by 2020 and will be joint-bottom with Italy next year. Let’s hope that prediction doesn’t turn out to be right. It was quiet in the eurozone on Friday, but this week promises to be extremely busy. We could see some euro movements, especially if the German GDP growth rate figures are disappointing like many are predicting.

Extremely quiet for economic data today, but tomorrow we will see the German ZEW economic sentiment index for November. It is expected to fall even further back as trade war fears continue to affect business confidence. The same release for the eurozone is on the schedule too, while Wednesday is a big day, with the German GDP growth rate set for release.

USD: lowest consumer sentiment in US for three months

The only release of note from the US on Friday was the University of Michigan’s consumer sentiment which had been expected to dip to 98.0 from 98.6 in the previous period. The reading actually better expectations by coming in at 98.3, but the reading is still the lowest for three months.

Trump was criticised over the weekend for failing to attend an event honouring US military dead. The White House cited rain that grounded the president’s helicopter, but has since said that he couldn’t travel by car instead because Trump didn’t want to cause disruption.

Tomorrow we will see consumer inflation expectations for October, but things don’t really get going in the US until Wednesday, when we will see the inflation rate for October. On Thursday we will see retail sales figures for October and Friday has the industrial production figures.

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