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Neutral outlook for sterling as UK growth evens off

Neutral outlook for sterling as UK growth evens off

The pound has managed to hold up fairly well over the last six months. It was bested only by the Swiss franc and US dollar in spite of the uncertainty surrounding this year’s General Election in the UK. In fact the pound actually went up in the lead-up to the May vote, despite polls pointing to the possibility of a Labour minority government. We also had to contend with a gradual weakening of economic data in the opening months of 2015 with a surprisingly weak performance in Q1, which showed a growth of 0.3%. As we head into the latter part of Q2 we’ve also seen some significant weakness in the manufacturing, construction and services sectors, which could well be attributed to the rising uncertainty ahead of the recent general election. Despite this weakness, the key indicators have, at no time, dipped into contraction territory. The slowdown in some economic indicators has raised concerns about a slowdown from the growth levels in 2014. These levels were never going to be sustainable, however, given the continued reliance on consumer spending and the services sector in driving GDP in 2014. We continue to see bright spots as inflation pressures abate. In some cases, inflation has gone negative as energy and food prices have helped ease the fiscal squeeze on the hard-pressed UK consumer. Unemployment levels also continue to come down though concerns remain over weak levels of productivity. The biggest concern going forward is that the slowdown seen elsewhere in the world could well spill over to some economic weakness here as economic activity in the US and China slows down. Recent downgrades of both the US and Chinese economies in 2015 by by the OECD and IMF would appear to reinforce those concerns. (Chart source: CMC Markets) For now GDP growth in Q2 looks like it could well struggle to exceed the 0.3% of Q1, but it would be disappointing if it were to drop below it. The main PMI indicators for Q2 in both the manufacturing and construction sectors have averaged below the readings seen in the first quarter of this year, however, the services sector average has come in slightly higher in Q2 than Q1. One other factor explaining the weak performance in Q1 was the fact that consumers did rein back on their spending with a 0.1% decline in retail sales over the quarter. There does seem to be some evidence, however, that now the election is behind us these could improve, and on current evidence that does appear to be the case. So far in Q2 the picture has been better which, unless we see a significant pull back in Q2, should bode well for a positive Q2. The overall bias for the pound against the US dollar is pretty neutral over the next few months after the recent rebound seen in April, and we could see it trade higher in a broad range towards 1.6200. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

Read all of our Q3 articles:

Overvaluation of stock markets and wishful thinking Cooling China brings ANZ back to the pack Q3 market outlook: sector performance and earnings season preview European economy faces significant headwinds Bonds: all traders should be watching bond charts What does the OPEC meeting mean for oil prices? Chinese equities: Will it all end in tears? The Japanese stock market could continue to rise in the coming months Q3 market outlook: a swing trading summer looming for US markets?

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