UK GDP the calm before the storm

Price action has been fairly muted in the equity market in the first half of Wednesday’s session as markets digest positive Lloyds earnings data, a strong German IFO and a mixed bag for UK GDP data. French election risks are also on investors’ radars, as the markets react to daily changes in the polls and the chances of far right candidate Le Pen winning in May.

Digesting GDP: an economy on the up before the fall?

UK GDP was generally strong, the quarterly data was upgraded to 0.7% from 0.6%, while the annual rate was actually revised down to 2% from 2.2%, knocking the UK off the top of the G7 2016 growth charts, that crown now passes to Germany. In fairness, the downward revision in the annual rate was largely due to oil and gas production in the North Sea, which is an industry-specific factor, rather than a broader sign for the overall economy. Although the UK did well in 2016, there are some worrying signs that could impact growth in 2017.

The chief concern is business investment, which fell 1% on the quarter and was down 0.9% as a whole for 2016. This is a concern, as future growth is dependent on strong investment, if businesses are already holding off spending before Article 50 has even been triggered.  It’s not unreasonable to think that investment could decline further, especially if there are bumps along the road of the UK’s Brexit process, thus, 2016’s decline could be the start of a worrying trend.

Could the recovery in the pound hurt UK’s trade prospects?

The good news included in the UK GDP report was the boost to exports, growth was revised up to 4.1%, compared Q3 exports shrunk 2.6%, suggesting that the weak pound is finally providing a boost to UK trade. The good news may end there, as the pound is starting to get its mojo back vs. the euro, and EUR/GBP fell through its key 200-day moving average support level earlier this week. Since the EU is our biggest trading partner, a rising pound could now be bad thing, so watch this space.

Lloyds a bright spot in some bleak UK banking earnings

Elsewhere, Lloyds beat analyst earnings estimates and even raised the prospect of a dividend payment. The bank, which is soon to be free of government ownership, was a bright spot in some weak banking earnings elsewhere, and questions about the profitability of the UK (and Europe’s) banking sector are likely to swirl for some time.

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