The preliminary estimate of second quarter UK GDP is out, and it’s bang in line with expectations.
And the ONS says quarter-on-quarter growth could have been as high as 0.7 per cent without several “special factors”.
The chained volume measure of gross domestic product (GDP) rose by 0.2 per cent in the second quarter (Q2) of 2011. There were a number of special events in Q2:
• The additional bank holiday for the royal wedding
• The royal wedding itself
• The after-effects of the Japanese tsunami
• The first phase of Olympic ticket sales
• Record warm weather in April
It is not possible to state precisely what the net overall impact of these special events might have been. Estimates, using standard statistical techniques, have been constructed for what could have happened in April, May and June for each of the main aggregates in the service and production sectors, if the special events outlined above had not occurred. This has then been compared with the actual estimates that we produced. The results of this analysis indicate that Q2’s special events may have had a net downward impact on Q2 2011 GDP of:
• 0.4 per cent in the services sector
• 0.1 per cent in the production sector
These estimates must be regarded as broad brush and illustrative. There can be no certainty as to the impact of the special events and there may be other factors at play.
Hmm. 0.7 per cent. Hardly anything to get excited about is it? In any case that’s probably not the underlying growth rate of the economy, which has flat-lined since September.
Indeed, Howard Archer of IHS Global Insight says the estimate is nothing to celebrate.
The GDP report is weak but not as bad as it could have been. While the worst fears were not realised, growth of just 0.2% in the second quarter after flat activity in the previous two quarters combined is hardly a performance to celebrate. GDP was up just 0.7% year-on-year in the second quarter.
Admittedly, growth was held back by a number of factors including the extra public holiday resulting from the Royal Wedding, manufacturing supply chain disruptions resulting from events in Japan and oil and gas extraction being limited by maintenance work in the North Sea, but the softness clearly runs deeper than that.
That said, cable (the exchange rate, not the minister) has responded positively.
RTRS-STERLING <GBP=D4> RISES AFTER UK GDP DATA
RTRS-UK SEPT GILT FUTURES EXTEND LOSSES BY MORE THAN 20 TICKS, HIT SESSION LOW AFTER IN-LINE Q2 GDP DATA
RTRS–STERLING RISES TO 6-WEEK HIGH VS DOLLAR OF $1.6410 FROM $1.6340
As for the business secretary….
RTRS-UK GOVT MINISTER CABLE SAYS LATEST UK GDP FIGURES WERE “NOT SPECTACULAR” BUT HE “IS NOT SURPRISED BY THAT”
RTRS-UK GOVT MINISTER CABLE SAYS THERE IS “NO NEED FOR A PLAN B” ON UK ECONOMY, GOVT MUST STICK TO DEFICIT REDUCTION PLANS
RTRS-UK’S CABLE SAYS “WE ARE GETTING GROWTH”, UK ECONOMY IS GETTING BUILDING BLOCKS FOR MORE BALANCED AND SUSTAINABLE GROWTH
RTRS-UK’S CABLE SAYS UK ECONOMY IS RECOVERING AND “IS RECOVERING IN THE RIGHT WAY”
Update: 10.20am (London time)
A view from the gilt market, via Andy Chaytor at RBS:
GDP comes bang in line with consensus and as we expected, and wrote in this morning’s daily, the initial market reaction was Gilts to sell-off as the market had got into a lather about a negative number. The bigger picture view (weeks and months, not hours) is that this is a good number for the Gilt market. Growth at these very sluggish levels is 1) certainly weak enough that you can not worry about MPC hikes for a very long time, but 2) not sufficiently weak to derail the UK’s AAA status.
We think it likely that some would take issue with these points.
On point 1 they would say that this is now fully priced with the first full MPC hike priced for October 2012. On point 2, while it was a negative number that those who were trying to push the ‘UK isn’t a safe-haven’ line were getting excited about, we have no doubt that they will look at a cumulative growth of just 0.2% over nine months and pronounce that the UK’s rating is at risk. Let’s take these points in turn.
Actually, let’s just look at point 2.
The UK hasn’t been totally repriced over the past 15 months because the deficit has collapsed, it has been repriced because of the evident and absolute political commitment to get the deficit down which when compared with peers in the likes of US or France leaves the UK as a very obvious relative safe-haven. Is that political commitment diminishing? We think not. David Cameron is quoted in the Telegraph today saying “There’s no country, really, that can afford another fiscal stimulus…They’ve all run out of money…The right step for an economy like ours is to get on top of your debt and your deficit and then make it a better place for businesses to grow and expand and employ people.” On the other end of the political spectrum within the Coalition government, Vince Cable was reported by Bloomberg, speaking after the GDP release “There’s no need for a Plan B…We have to stick to the deficit-reduction commitments”. Taken together, these comments provide a pretty powerful message.
Following this number, the chatter about the UK losing its rating might calm down. If it does not, we caution in the strongest possible terms not to get caught up in this debate – at least with your positioning. Time and time again in the past 15 months the market has whipped itself into a frenzy of Gilt bearishness and we have even been lucky enough to catch the odd episode of this, such as the flatteners we ran from November to February. But unlike many in the market we have always had in mind the bigger picture view that a necessary consequence of the gargantuan deleveraging the UK is attempting is very low bond yields for a very long time. Stay bullish. We target 2.75% in 10y Gilt yields.
Related links:
UK output increases by 0.2% – ONS
Q2 GDP briefing note – ONS
Weak UK growth puts AAA rating at risk, experts warn – Daily Telegraph