Last Thursday, BOE Governor Bailey cautioned that the UK’s recovery has been uneven.
He claimed that he does not expect the growth rate we saw during the summer to continue into autumn.
The comment didn’t have a major impact on the markets, because the BOE typically stays on the extra cautious side. However, after Chancellor Sunak announced an end to the furlough program last week, it’s a convenient warning to keep an eye on economic indicators, even as Brexit drama dominates the news.
On Wednesday we get the final, official reading on the UK’s Q2 GDP.
While other countries have revised their initial readings higher, the current expectation is to repeat the preliminary numbers.
Expectations are for quarterly GDP to be confirmed at -20.4%, officially putting the UK into a recession.
Projections indicate that annualized GDP will also confirm -21.7%. Unless there is a major change from the Prelim numbers, we wouldn’t expect a major reaction in the markets.
Returning to the Brexit front, this week we have the ninth round of negotiations.
This comes after not much was accomplished earlier in the month.
While everyone says they are hopeful to reach an accord, they continue to accuse the other side of not being willing to negotiate.
For the markets, the stand-off leads to increased uncertainty. We can expect bank stocks, in particular, to remain under pressure for the rest of the year, due to the combined uncertainty regarding access to the common market and low-interest rates.
The UK’s economic recovery might be stimied as investors await two major points of uncertainty that won’t be resolved until late in the fourth quarter.
Firstly, they await the result of the election in the US, as this might shift America’s bias towards the continent. And secondly, they would need to see what happens at the end of the transition period on December 31.
Canada Keeps Surging Ahead
Also on Wednesday, we get the monthly report of GDP change in Canada from July.
To situate the figure in context, this was during the spike of cases in the US. There was a considerable worry of a second round of lockdowns at the time.
Canada had and has maintained its border closed, and didn’t experience an increase in cases. Oil prices had, by then, returned to stabilize around the current price.
Despite the context, however, expectations are for Canadian July GDP to have surged ahead, growing at 8.7% compared to 6.5% in the prior month.
Canada accumulated a loss of just over 17% of its GDP during the pandemic. And since then, it has reported 5.2ppts of recovery. This means that it still has 8.3% to go before returning to pre-pandemic levels.
Higher economic growth during the summer is normal, and many analysts expect the growth rate to moderate in the latter half of the year.
However, this pattern is likely to be priced into the trajectory of the CAD. And, we expect the evolution of oil prices as well as the economic situation in the US to have a greater impact on the exchange rate.