THE British economy has lost a lot of momentum. Last quarter it seemed to be roaring along like a Jaguar, growing by 0.7 per cent. Now, more like an old Rover, it seems to have stalled in the snow. Yesterday’s GDP statistics for the fourth quarter of 2010 revealed a fall in output of 0.5 per cent when the market consensus expected it to increase by about that much.
As a result, sterling was frozen out. Against the dollar, it dropped by 1.30 per cent to $1.579. Against the euro, it was down by 1.35 per cent. Few now think that an interest rate rise – a hot topic of conversation last week – is still likely in the summer. Instead, the Bank of England (BoE) seems to be caught in a trap between inflation and low growth – and is likely to care more about the latter.
But the GDP figures released yesterday were only a first estimate, based on just 40 per cent of the economy. The Office for National Statistics (ONS) also blamed much of the fall on last month’s snow; which, if true, might make for a big rebound in the next quarter’s data. That suspicion might have limited the fall of sterling yesterday. But as the shock filters through, might not sterling have further to fall?
Glenn Uniacke, a senior dealer at Moneycorp, certainly thinks so. As he points out: “These figures are really absolutely horrendous . . . they’re scary – as good as another recession”. Even if they prove to be slightly out, Uniacke argues that sterling could well drop back to the $1.45-$1.50 range quite easily. He reckons that $1.55 is a decent target for the moment, and if sterling breaks through that, it could well drop much further.
Against the euro, however, further falls are less assured. As Uniacke points out, much of Europe suffered from the snow as badly as Britain. European GDP figures are due to be released in February – if they prove to be as bad as in the UK, then the pound could well recover. But if they are much stronger, sterling would be likely to lose ground quickly. Given that, Uniacke argues that it would be wiser to buy the dollar, which should do well regardless.
But others are less pessimistic. As Jeremy Cook, chief economist at World First, pointed out, revised GDP data can be “wildly different”, and many traders yesterday had arguably been “looking for a reason to sell”. Indeed, Ian Harwood, chief economist at Evolution Securities, goes one further, pointing out that the ONS has “hardly covered itself in glory in recent years” with its GDP estimates. Harwood points to the monthly composite PMI survey as contradicting the ONS figures. That figure was buoyed up by exceptionally strong manufacturing data, however, while services and construction registered declining figures.
“The market’s attention is likely to turn to what light the next raft of UK PMI surveys due to be released next week will cast” says Harwood. If the construction and service sectors seem not to be doing so badly after all, then sterling may recover some of its poise. If the next revision to the GDP data softens yesterday’s blow, then it may even leap back up.
Based on yesterday’s figures however, that seems unlikely any time soon. Only the most contrarian of traders would seem keen to buy sterling right now.