GDP rose by 0.8% in the first quarter of this year, which missed expectations of 0.9% but suggested steady growth after a 0.7% reading for Q4 2013. Growth was higher in three of the UK’s four sectors, with a 0.9% increase in services, 0.8% in production and 0.3% in construction, according to the Office for National Statistics.
The agricultural sector saw growth decrease by 0.7%, although this sector may have been adversely impacted by flooding around the country in the first couple of months of this year.
The Weather Effect
The ONS mentioned that there was “some evidence” to suggest the storms could have affected construction output; however the ONS decided not to classify it as a statistical special event. However, the weather effect could still impact growth in the coming months.
Construction may pick up in the second quarter on the back of post-flood reconstruction; there could also be some pent-up demand in the agricultural sector after a weak start to the year. Thus, although growth may have disappointed expectations of an upside surprise, we believe there is still plenty of gas in the UK’s economic tank and we may continue to see solid growth in the second and even third quarters of 2014.
Bright Spots
The manufacturing renaissance continues, expanding by 1.3% in the first quarter, the fastest rate of growth since 2010, which suggests a more balanced recovery compared to what some had first thought when growth started to bounce back last year.
Although growth has been picking up over the last 12 months, our economy is still 0.6% below its peak in Q1 2008. During the financial crisis the economy shrank by 7.2%, and the road to recovery has been a 5-year slog. However, on the bright side, if the economy can continue to fill this growth gap then it suggests there could be further employment gains to come as the UK tries to get back to its pre-crisis peak.
This is only the first reading of GDP, we will get a more detailed break-down in subsequent readings. Also, this preliminary estimate has less than half of the total data that is needed to determine GDP so there is a high chance that this figure could be revised down the line, although revisions are typically small.
The Market Impact:
Although the market’s initial reaction to the GDP “miss” was to sell sterling, the downside has been fairly limited so far, and the low on Tuesday has been 1.6793. The market could be looking ahead to potential pent-up demand as the construction and agricultural sectors get back on their feet in Q2. Thus, the upside in GBP/USD still looks intact from our view.
Dips below 1.6800 appear to be meeting demand, if we can get above 1.6858, the high from Monday, then this may open the way to 1.6978 – the 100-month moving average, and then potentially to 1.7091 – the top of the monthly Ichimoku cloud.
Key support levels in the short-term include:
- 1.6706 – the 38.2% Fib retracement of the March-April advance.
- 1.6661- the April 15th low.
- 1.6556 – the April 4th low.
Takeaway:
- UK growth is still looking strong, even though some sectors may have been impacted by bad weather at the start of the year.
- This is only a preliminary reading so there could be revisions.
- The economy is still 0.6% smaller than it was in Q1 2008, as the economy tries to close this gap we could see continued gains in employment.
- The shallow dip in the GBP post the GDP release suggests that the market is still confident that the economy is on the right track, and the GBP/USD uptrend remains in place post the data release.
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