Weak but above expectations UK GDP fails to shake GBPUSD

In today's release, the Office of National Statistics (ONS) reported that the much-awaited Q3 GDP improved by 0.6% YoY which was in line with market estimates and unchanged from Q2 results.

This was also above consensus estimates of 0.5% as reported by TradingEconomics.com.

Having said that, this is the lowest registered growth since April 2021 which had witnessed a contraction of 6.7% YoY amid the global health crisis.

On a quarterly basis, the data showed no growth at 0.0% QoQ for Q3 GDP, although this outperformed consensus estimates of (-)0.1% QoQ.

This also marked the weakest growth in four quarters.

For the month of September 2023, the UK’s GDP increased by 1.3% YoY compared to 0.5% YoY for August 2023.

The 3-month average for the GDP was flat at 0.0% but outperformed consensus estimates of (-)0.1% while falling short of the previous reading of 0.3%.

Overall, the annualized upside was likely a relief to markets, but the economy continues to maintain a tepid growth trajectory this year, plagued by the highest inflation among advanced economies, unsustainable energy costs, restrictive monetary policy, and fears of an impending recession.

Other economic data releases

On an annual basis, industrial production and manufacturing production rose 1.5% YoY and 3.0% YoY, respectively for the month of September 2023.

However, on a monthly basis, industrial production registered no growth at 0.0% MoM, even though it was above the previous month’s contraction of (-)0.5% MoM.

Manufacturing production improved strongly from (-)0.7% MoM in August 2023 to 0.1% MoM in the latest report.

Preliminary data for business investment saw an uptick of 2.8% YoY but moderated sharply from the previous quarter’s 9.2% YoY.

In addition, this was well below market forecasts of over 6% YoY.

Construction orders continued their sharp decline, falling (-)20.0% YoY compared to the previous report’s (-)17.6% YoY.

This was a sharp knock given estimates of positive growth among industry analysts at TradingEconomics.com.

The bright spot came in the shape of construction output which rose 2.8% YoY in September 2023, higher than the previous report which showed growth of 1.8% YoY.

The British pound

Given the rise in global fears of a sharp recession, several key central banks have paused their rate hikes for the time being.

This includes the Bank of England where policymakers have maintained the bank rate at 5.25% in their November meeting.

Although GDP data was broadly above market expectations, the GBPUSD pair did not show much momentum.

The currency pair is trading at 1.2221 at the time of writing, marginally above the session low of 1.2211.

Sliding consistently since reaching a 52-week high of 1.3142 in mid-July 2023, the pound will find it challenging to gain significant momentum without at least breaching 1.240 levels.

However, given the relatively weak prospects for the UK economy moving ahead, achieving this seems unlikely on a sustained basis.  

A crucial dampener is inflation with the September CPI coming in at 6.7% YoY and core inflation remaining elevated at 6.1% YoY.

Despite the acceleration in the price level, rate cuts are expected to take effect in 2024, while the National Institute of Economic and Social Research (NIESR) has estimated a three-in-five chance that the economy will enter a recession by 2024.

The report suggests that to defend against the cost-of-living crisis across the economically weakest demographics of the UK, this would require,

This signals that the government is likely going to need to make supportive payments and invest in additional welfare policies, possibly foregoing at least some growth potential in the future.