In the coming week it is Wednesday’s release of the preliminary estimate of Q1 GDP that takes centre-stage for the British pound, and some slowdown from Q4’s 0.6% quarterly rise looks inevitable.
The upcoming economic growth statistics will be scrutinised moreso than in the past as analysts try to get a feel what effect, if any, the debate around the upcoming EU referendum is having on the real economy.
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The final estimate of 2015's Q4 GDP showed a stronger-than-expected 0.6% q/q print, up from 0.5% at the second estimate.
However, the ONS release also showed an intensification of underlying imbalances – in particular the current account deficit rose to a record 7% of GDP, while the savings ratio fell to an all-time low of 3.8%.
“Both developments suggest that this pace of activity is unsustainable. Moreover, survey and official data since the New Year indicate that the jump in anxieties about the global outlook and associated financial market volatility have pressed on Q1 momentum,” says Michael Sawicki, economist at Lloyds Bank.
The gaping current account gap is the single most important economic risk for the British pound when it comes to the EU referendum debate. Indeed, it is this that could see the pound to euro rate potentially hit parity some argue.
The UK is importing more than it is exporting creating the perfect conditions for a weaker currency. If it weren’t for foreign investment flows the pound would be lower - and these inflows could dry up in the aftermath of a vote to leave Europe.
We would however caution that this would only likely be a temporary impact.
Estimates for Q1 GDP
Markets are forecasting a reading of 2% on the headline year-on-year growth data, just lower than the previous 2.1% reading.
The quarterly comparison is forecast to read at 0.4%, down from a previous 0.6%.
Lloyds Bank have penciled in a 0.4% outturn.
Capital Economics have meanwhile said they are forecasting a 0.4% increase, although there is a significant risk of a weaker number.
We note that recent business surveys have been overwhelmingly downbeat.
The Markit/CIPS composite PMI is now consistent, on the basis of past form, with quarterly GDP growth of just 0.3% or 0.4%.
Capital Economics note the hard data available so far haven’t been particularly encouraging either. Net trade looks set to subtract again from GDP growth in Q1 – perhaps by about 0.5pp.
And barring a sharp rebound in March, industrial production will drag a bit more from growth than was the case in Q4.
“Admittedly, a punchy rise in construction output in December should mean that quarterly construction growth accelerates in Q1. But given its small share of GDP, it’s unlikely to contribute much,” says a note from Capital Economics
What’s more, activity in the dominant service sector probably slowed.
The CIPS/Markit Services PMI points to growth of around 0.5% in Q1, down from 0.8% in Q4 (see Chart) while retail sales have come off the boil in recent months.
