HomeContributorsFundamental AnalysisUK Q2 GDP Growth Initial Estimate Pushes Sterling Down

UK Q2 GDP Growth Initial Estimate Pushes Sterling Down

On Wednesday, sterling edged down after initial UK GDP growth estimates showed that the expansion of the British economy continued its downtrend in the June quarter, recording the lowest yearly growth since 2013. This followed the IMF’s downgrade of its UK GDP growth forecasts on Monday. With uncertainty around Brexit talks in the background, which have not made any significant progress so far, the BOE policymakers are expected to keep interest rates steady next week.

According to the Office for National Statistics, the British economy grew by 1.7% year-on-year as expected in the second quarter, dropping below the previous quarter’s mark of 2% and posting the lowest growth since 2013. In contrast, on a quarterly basis, UK GDP growth improved marginally, rising in line with expectations by 0.3% and surpassing the figure of 0.2% in the March quarter. The main growth drivers were the service sector companies (including mainly distributive, and film production companies as well as hotels and restaurants) which expanded in total by 0.5% quarter-on- quarter and by 2.3% year-on- year. On the other hand, the output of the manufacturing and the construction sectors contracted by 0.5% and 0.9% respectively on a quarterly basis, while compared to the previous year, the sectors grew by only 0.3% (manufacturing) and 0.8% (construction).

Regarding GDP per capita, which is an important measure of standard of living, it increased by 0.1% quarter-on- quarter and by 1% year- on- year.

With inflation being above the target of 2%, unemployment falling to its lowest level in more than 40 years, wages posting weak growth and following today’s numbers on GDP growth, the odds for a rate hike at next week’s Bank of England meeting, are receding. In addition, following the release of the data, the finance minister Philip Hammond characterized the growth rate as "steady" and supported that a boost to the economy would arise only if consumers and businesses were more certain about Brexit which is heavily weighing on British economic performance. He also highlighted the importance of raising productivity saying that "We need to focus on restoring productivity growth to deliver higher wages and living standards for people across the country".

Looking at the forex markets, sterling despite showing relative resilience against the greenback in recent weeks, fell slightly from $1.3025 prior the data release to a low of $1.2998. However, it managed to jump above $1.30 afterward. Euro/pound and pound/yen remained flat around 0.89 and 145 respectively.

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