British Pound Tumbles on Data Dump, BoE's Broadbent Ahead
- Written by: Gary Howes
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Pound Sterling fell against the Euro, US Dollar and other major currencies following the release of data that was on-balance worse than analysts had forecast. However, there are signs of encouragement regarding the second-half of 2017.
The ONS has released a tranche of economic statistics on Friday, September 29 including GDP, Business Investment and the Current Account.
The stand-outs include a surge in business investment but an unexpected cut to annualised GDP. The widening in the current account as also much greater than expected.
With regards to the data, here are the numbers to watch:
- GDP (YoY) (Q2): 1.5%, Forecast reading: 1.7%, previous: 1.7%
- GDP (QoQ) (Q2): 0.3%, Forecast reading: 0.3%, previous: 0.3%
- Business Investment (QoQ) (Q2): 2.5%, Forecast reading: 0%, previous reading 0%
- Current Account (Q2): -23B, Forecast reading: -15.8B, previous: -16.9B
The Pound has ignored the impressive business investment data and has instead focussed on the GDP downgrade and the widening in the current account deficit.
At the time of writing, the Pound is in retreat:
The Pound-to-Euro exchange rate is at 1.1353 having gone as high as 1.1406 earlier in the day.
The Pound-to-Dollar exchange rate is at 1.3390 having gone as high as 1.3442 earlier in the day.
In response to the data, Michael Stanes, Investment Director at Heartwood Investment Management says the data confirms why his team maintains a cautious approach to UK assets, being short duration in UK gilts, underweight UK property, underweight UK equity and diversifying some of their currency exposure outside of the UK.
"While Brexit has added to the uncertainty, high levels of consumer debt, an unstable political backdrop (even pre-Brexit referendum) and substantial twin deficits as a result of the unbalanced economy have been reason enough for this long-held view,” says Staines.
Despite the headline disappointments, a thorough breakdown of the data reveals there is reason to be cautiously optimistics about the economy's performance in the second half of 2017.
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GDP Downgrade, but Outlook Better
The data confirms the UK economy slowed in the first half of 2017; something we already knew as today's release is a second estimate, but the downgrade to annualised growth suggests the slowdown was a little greater than initially suggested.
But, there are some positives concerning the outlook.
According to Paul Hollingsworth, Senior UK Economist with Capital Economics, the most interesting element of the National Accounts was the sweeping revisions to the data, including the implementation of the ONS’ annual methodological overhaul.
Hollingsworth notes the breakdown for Q2 now looks more encouraging, with quarterly growth in household spending revised up from 0.1% to 0.2%, and business investment from 0% to 0.5%.
"What’s more, the National Accounts painted households’ balance sheets in a much better light," says Hollingsworth, noting:
The household saving ratio has been revised up on average by 0.9pp between 1997 and 2016. And the impact in more recent quarters was even more significant – Q1’s figure was revised up from 1.7% to 3.8%. And the saving ratio picked up to 5.4% in Q2, the highest since Q3 2016.
This should alay some fears that the UK's private sector debt is becoming unsustainable.
Current Account Deficit Widens
The current account deficit matters greatly for the Pound.
A deficit suggests that ultimately the UK imports more than it exports. There is nothing wrong with a current account deficit - as long as it can be funded. i.e. the UK must attract sufficient foreign investment currency flows to maintain the stability of Sterling.
The widening of the deficit therefore places increased pressure on investor inflows - and should these inflows fade on Brexit unceratinty, then Sterling must naturally fall lower.
The UK’s current account deficit was £23.2 billion (4.6% of gross domestic product) in Quarter 2 (Apr to June) 2017, a widening of £0.9 billion from a revised deficit of £22.3 billion (4.4% of gross domestic product) in Quarter 1 (Jan to Mar) 2017.
The widening in the current account deficit was driven by a widening to the deficit on primary and secondary incomes, which widened £1.4 billion and £1.9 billion respectively; these were mostly offset by a narrowing of the deficit on trade in goods which narrowed £2.3 billion in Quarter 2 2017.
There was some good news in that the total trade deficit narrowed to £6.5 billion in Quarter 2 2017, primarily due to increased exports of trade in goods of which; exports of chemicals increased by £1.1 billion and exports of oil increased by £0.8 billion.
Business investment surges
A jump in business investment is the positive in today's data and could well ultimately limit the damage inflicted on Sterling.
Gross fixed capital formation (GFCF), in volume terms, was estimated to have increased by 0.6% to £81.2 billion in Quarter 2 (Apr to Jun) 2017 from £80.7 billion in Quarter 1 (Jan to Mar) 2017.
This suggests businesses are investing regardless of any Brexit uncertainty, and one can only assume that this trend will pick up as negotiations progress and the outlook becomes clearer.
In all, a positive for the Pound as it could convince the Bank of England that the economy remains on track, despite slowing economic activity in the first half of the year.
Bank of England's Broadbent Ahead
Watch comments from BoE policy-maker Ben Broadbent (pictured above) in early afternoon.
Broadbent is participating in a panel discussion and is known to be a ‘hawk’ i.e. a member of the Monetary Policy Committee who would like to raise interest rates.
Markets will be listening for explicit confirmation of this, particularly ahead of the 2nd November policy meeting.
“The highlight for GBP markets today will be a speech by BoE Deputy Governor Broadbent; policy comments aren’t necessarily guaranteed, but any reference to tightening would reaffirm the markets bias towards a Nov BoE hike,” says analyst Viraj Patel with ING Bank N.V.
