By Neil Staines
“UK economy showing first rays of sunshine” – Danny Alexander
Today we take a step back from the short-term fluctuations and intent focus of the markets on the monetary policy dynamics of the US and eurozone that have dominated market analysis of late and take a look at the UK.
After a period where the UK data seemingly plateaued (albeit at historically high levels), sentiment towards the UK and GBP deteriorated sharply. Our view however remains unwaivering and the recent data outperformance amid growing signs of rising business investment suggests that the (near term at the very least) future for the UK and for GBP is potentially very bright indeed.
On Tuesday the IMF released its updated global economic forecasts which highlighted the UK growth prospects as the brightest among G7 nations. The new IMF forecast for the UK is 2.9% this year, up from 2.4% as recently as January and just 1.5% a year ago. Indeed when asked specifically about the UK economic performance and the IMF’s previous warning about the need to change fiscal course, IMF chief economist Olivier Blanchard said: “It is fair to say that our forecast was too pessimistic… growth was clearly stronger.” Further, its expectation is for UK growth to retain the higher baseline level well into 2015, where the IMF predicts a further 2.5%.
The IMF did caution that business investment and exports remained disappointing, however, this is where we believe the next leg of UK growth and likely the next leg of broader GBP strength emanates from as we move into H2.
“all the right notes, but not necessarily in the right order” – Eric Morecambe
The British Chamber of Commerce (BCC) suggested this week that manufacturing and services firms are reporting the strongest investment and export growth in more than a century. The BCC said services exports surged in Q1 with 38% more firms suggesting outward trade is rising than falling. In addition to this manufacturing firms posted record increases in employment and investment, confounding the concern of over-reliance on the consumer at this stage of the recovery and that business investment remains weak.
Tuesday also brought stronger than expected industrial production data (after a disappointing January) and perhaps most significantly the National Institute of Economic and Social Research (NIESR) released its estimate of Q1 UK GDP, which suggest the fastest pace of expansion in 4 years at 0.9% quarter on quarter. The ONS data for Q4, highlighted encouraging signs for UK business investment when the breakdown became available and, if our expectations and the anecdotal evidence proves correct we would anticipate that this could translate into a 1% (or above) reading for the official Q1 GDP release.
“If the fact don’t fit the theory, change the facts” – Albert Einstein
On a technical note (and one which has been largely ignored by the broader market), the Office of National Statistics (ONS) has announced that it is changing measurements of areas such as business investment (including R&D) and pensions savings in their national account statistics, potentially increasing the size of the economy (under the new facts!) by up to 5% as well as boosting (at least the appearance) of stability through a significantly higher recorded savings ratio.
Our analyses continue to support our (now long held) view that the UK leads G7 in monetary tightening with a rate rise in Q4 2014 (followed and subsequently outpaced by rate rises in the US from Q1 2015) and as this realisation filters through into the market it is likely to further boost GBP. We have also stressed that we continue to see increasing economic outperformance in the US and on this basis, the next leg of GBP strength is unlikely to be centred around a higher GBP vs. USD as was the case in H2 ’13, but we see a broader strength in GBP reflected in significant gains vs. EUR, AUD, CAD and (though potentially with much higher volatility) JPY.
In summary, GBP and the UK have not been central to the market’s attention of late and even when attention has been drawn to the pound it has been met with apathy and increasingly negative sentiment. Recent data and forecasts should however bring a positive GBP focus back to the fore and as the economic recovery broadens, and clearer signs of a pick-up in business sentiment and investment pick up (as we expect it to) GBP should have many more days in the sun.
Neil Staines is head of trading and execution at ECU
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