Another strong year of growth predicted

Paresh Davdra is the Dealing Director of RationalFX, Currency Specialists. Tuesday 05th May 2015 15:56 EDT

Britain's economy slowed sharply in the first three months of 2015, gross domestic product grew by 0.3 percent in the January-March period, the slowest quarterly rate since the end of 2012. The UK's initial estimate of Q1 GDP was 0.3%, below expectations for a 0.5% expansion, and half the pace of Q4 2014 growth. Sterling initially fell on the disappointment but quickly resurfaced.

Economists said the weakness was likely to be a blip, with the economy still on course for another strong year of growth. But coming just nine days before what looks like being the closest national election in a generation, the numbers put Cameron's Conservatives on the back foot.

The preliminary estimate of Q1 UK GDP lacks details and is based on less than half of the information that will ultimately go into the final estimate. ONS indicated the slowdown was led by the service sector, which expanded by 0.5%, the least since Q2 2013.  Production fell 0.1%, and construction output fell 1.6%.  The 2.4% year-over-year growth compares with a 2.6% expectations and 2.7% growth in 2014.

The weak first-quarter growth contrasts with an upbeat tone from the Bank of England at its latest monetary policy meeting, and most economists expect the economy to keep its momentum in 2015 after last year's growth of 2.8 percent. "We think underlying growth in the economy is significantly stronger than in today's data," said Kevin Daly, an economist at Goldman Sachs. "We would anticipate over time that the weak ONS data is likely to be revised higher into line with the stronger activity implied by business surveys and other activity indicators." But some economists have said an inconclusive outcome of next week's elections could hurt confidence and slow investment.

The Euro strengthened against a host of currencies after the Euro-zone ended four months of deflation in April with consumer prices unchanged from year-ago levels, removing the threat of persistent price declines as energy costs pushed up in the month. The bottoming out of price declines is welcome news for the European Central Bank who started printing money in March to inject more cash into the economy and ward off concerns of persistently falling prices, or deflation, showing the quantitative easing programme is working. Analysts had begun questioning whether the ECB will need to carry out quantitative easing all the way through to September 2016; the data suggested otherwise which boosted the currency.

Manufacturing growth across the currency zone as a whole eased off slightly in April from March’s 10-month high, according to the latest Eurozone manufacturing PMI. With the reading coming in at 52, this is just down on the revised figure of 52.2 for the previous month. Ireland and Spain led the continued expansion although the pace of growth slipped, whereas factories in Greece and France suffered falling production and job cuts.

Manufacturers also raised average selling prices for the first time since August 2014, news that will reassure policymakers at the European Central Bank (ECB) after launching a large-scale quantitative easing (QE) programme to head off deflation. Since the €60bn-a-month stimulus programme was launched in March, data from the currency union has pointed to steadier growth – official figures last week showed the four month run of deflation came to an end in April.

Consumer confidence unexpectedly declined in April to a four-month low as Americans’ views of the labour market and the outlook on the economy deteriorated. The fewest respondents in four months said jobs were plentiful in April and income expectations cooled, the report showed, signalling consumers will remain guarded about spending. The setback in sentiment may indicate demand will be slow to pick up after a stronger dollar, bad winter weather in some regions and a labour dispute at West Coast ports weighed on the economy in the first quarter.

Last week saw an incredibly disappointed GDP figure from the US, with the QoQ growth coming in at 0.2% against a 1.1% consensus which was the lowest growth figure since June 2014. Treasuries and US equities both initially saw a knee-jerk reaction however the moves were not sustained as the statement did not hint at a change in policy stance.  

In a statement from the FOMC, they announced that the lack of growth is not a cause for concern. Extreme winter weather, strong dollar and collapsing oil prices that have stalled the US energy boom contributed to the slowdown. The US central bank has indicated it will raise rates soon, as long as the US economy continued to grow, but the timing of the increase remains uncertain. The Fed also decided to remove any specific references to calendar dates when discussing the timing of a rate rise, which could further confuse markets, which have often reacted badly to any hint of the end of cheap money in the US economy.

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