How the UK GDP Results Should be Interpreted


The real GDP figure for the UK came out more positive than expected for the three months ending in July, although this is still mainly attributed to the growth in consumption during the World Cup period. The ONS aptly makes note of this, suggesting that “When Quarter 3 (July to September) growth is calculated, the poor growths of February and March will have dropped out of the base period”. Even though it is only hinted in the above sentence, what investors should take from it is that the overall growth rate of the third quarter, which includes July, would most likely be less than the 0.6% number produced today, unless growth in August and September compensates for this.

Still, growth for July was higher than expected, at 0.3% versus a projected 0.2% growth. Again, this could be part of the “World Cup Effect”, given that England played its last match on July 14. Construction increased by 0.5% in July, at a record higher level, driven by stronger than usual growth in housebuilding. Services also grew by 0.3%, driven by retail and wholesale trade, which adds more credibility to the World Cup Effect. In contrast, manufacturing recorded negative growth rates in July, marking the fifth consecutive rolling period with negative growth rates. Overall industrial production growth slowed to 0.1% in July against an expectation of 0.2%.

Excluding the real GDP figure, the UK has faced a deterioration in manufacturing and industrial output which would have plunged the Sterling in any other day. Still, better-than-expected real GDP results saved the day. In our view, real GDP results were mainly driven by the positive developments in the Trade Balance, which came out almost GBP0.5 bln better than expected in July. This effect was likely a result of the sterling depreciation, which aided in UK goods price competitiveness. UK exports have been increasing since the Brexit referendum and the Sterling depreciation, albeit this can be mostly attributed to third parties and not with the EU. As previously elaborated, regarding the trade deficit and exchange rate relationship, this is probably why the EURGBP pair moved against the Sterling, while the Pound has gained with respect to the Deposit, Yen and the Loonie.

The lesson to be learned from the above is that data can be presented and interpreted in various ways. It is up to the trader to figure out which way is closest to the truth and, following from this, which way should be followed to place trade. As usual, remember that correct risk management strategies assist in minimising losses in the case our interpretation of the data is incorrect.

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