Looking Ahead to UK GDP

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After a couple of quiet days on the economic front, the UK has a raft of data coming up tomorrow. In terms of which are likely to move the markets, it’s a toss-up between monthly GDP and Manufacturing Production data.

While the market is still uneasily waiting for commentary from the Tory leadership contest, let’s focus on some hard data.

Usually, Manufacturing Production would take the lead. But, this time, the monthly GDP figure could take center stage. There has been a series of disappointing data points from retail sales figures to the recent PMIs. This has led analysts to be quite pessimistic about the data coming up.

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This could confirm the downward trend in GDP. And with tough talk from PM hopeful Johnson on a no-deal Brexit, the pound might be in further weakness.

What We Are Looking Forward To

The consensus among surveyed economists is that GDP for May will have popped back up to 0.3% growth. This would be a significant improvement over the -0.4% in the prior month. There has been almost a straight line down from the January figure. If the projections turn out to be true, it would completely reverse the trend. However, there is an increasing number of analysts who are less optimistic.

On the Manufacturing Production front, we’ll be looking at the month over month figure, since that’s the most likely to move the markets. Projections are for a return to growth of 2.3%, which would be the best performance since early 2017.

Last month reported a significant drop of -3.9%. This was the worst performance since 2012. It’s normal for this series to oscillate back and forth over the 0 line, so a strong positive number this time around would be normal and expected. A comparable figure to the prior month would be quite a negative sign. It could, therefore, further weaken the pound.

Other Data

Expectations are for Annualized Manufacturing Production to come back into positive as well. The consensus is at 1.1% over the -0.8% last month. We also get monthly industrial production at the same time which we can also expect to tick up to 1.5% compared to -2.7% last time around.

The main driver of the expectations for improvements in manufacturing is the weaker pound over the period. Last month’s trade deficit shrunk considerably, but that was driven by a drop in imports that was bigger than the drop in exports. The optimism on potential improvement seems largely theoretical given the recent trends in the data.

The GDP Situation

The last report showed that GDP shrank within expectations. This was after businesses increased inventory in March ahead of the presumed Brexit. However, with the resulting political disaster, the situation has changed. So May’s data would be further away from the Brexit distortion.

Economists are divided on what to expect from Q2 GDP figures, ranging from modest contraction to modest growth. The first quarter got an extra boost from the inventory building, but since then the data has been disappointing. If May’s GDP were to come in negative, then it would be hard to project growth for Q2 after two consecutive negative months.

With many UK companies holding on investment until the Brexit and trade uncertainties are resolved, we’d have to see significant beats in expectations to consider further long term sterling strength.


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