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UK Q4-2014 GDP Falls below expectations

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The fourth quarter preliminary GDP for the UK, released earlier today by ONS saw growth slow more than expected. GDP for the fourth quarter of 2014 slowed to 0.5%, below expectations of 0.6% and down from 0.7% during the third quarter of 2014.

The annualized GDP however managed to stay afloat, rising from 2.6% to 2.7%, but below the estimates of 2.8%. Index of services also fell below estimates to 0.8% against 0.9% consensus but remained firmer than previous month’s 0.7% reading, while on a month on month basis, the index of services declined to 0.1%, from 0.3% last month.

The Cable saw a reactionary sell off on the news, briefly dipping to 1.50595, the daily pivot level after managing to rally towards 1.511 during the early European trading session.

The Pound, which managed to ease from the lows of 1.49, has failed many times to break above the 1.51 handle and hold on to its gains. Against the Euro, the British Pound weakened as the EURGBP rallied towards the 0.75 handle at the time of writing. We however expect this reactionary sell off to be limited as we wait for the durable goods orders data from the US, which has declined for the third consecutive month. A weaker reading this time around, ahead of the crucial FOMC statement later this week is likely to put some pressure on the US Dollar, while giving support to pairs such as the GBPUSD.

The decline in the fourth quarter GDP was attributed to the decline in oil and gas production from the North Sea which affected the overall output. The GDP growth of 0.5%, albeit preliminary is being seen as one of the weakest quarterly GDP growth since 2013. Analysts were however quick to dismiss the current GDP reading considering that output from other sectors besides oil and energy continued to remain strong.

However, there was bad news from the construction and industrial sectors as output declined in the fourth quarter by 1.8% and 0.1% respectively. The services sector however managed to contribute the most to the GDP, rising close to 0.8% in the reported quarter.

Further revisions to the GDP is expected in the coming weeks, but if the current trend continues, the slowdown in growth will likely put more downward pressure on the Bank of England, which in its recent minutes showed two dissenters who were previously in favor of an early rate hike flock back to the dovish camp as the MPC votes now remained unanimous in keeping interest rates unchanged.

Expectations of a spring rate hike as speculated late last year also seems to be dissipating, painting a bleak future for the UK with no rate hikes for as far as 2016.

Photo by Nicolas Raymond

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