Britain Bounces Out of Recession!

The markets got a bit of good news last Thursday when U.K.‘s Office for National Statistics revealed that the British economy finally managed to crawl out of recession. According to the Q3 2012 preliminary GDP report, the U.K. grew 1.0%, opposite the 0.4% contraction it experienced in Q2 2012.

It was quite a treat for the market as it was the first positive figure in almost a year and it was the biggest rise in GDP in five years. In addition, the actual reading was also considerably above the market’s 0.6% growth forecast.

Details of the GDP report show that the pickup in the services sector was the primary driver of growth. Output in the service sector, which makes up more than three-fourths of its GDP, jumped 1.3% in Q3 after it had fallen 0.1% in Q2. It marked the strongest quarterly growth since 2007. Industrial production also made a notable contribution as it posted a 1.1% increase.

However, not all industries saw positive growth for the quarter. The construction sector, which accounts for less than 7% of the total GDP, sustained a 2.5% contraction during the quarter following a 3% decline in April to June.

The GDP also got a boost from two seasonal factors. The first one was Olympic ticket sales. It boosted the GDP by as much as 0.2%. The second was the reversal of the so-called “Jubilee Effect,” or the lost output that related to the extra public holidays during the second quarter. Without these two, Olympic ticket sales and the Jubilee Effect, growth for the third quarter would have probably been 0.3% only.

Overall, the market participants, economic gurus, and policymakers seem to be happy with the report. But, no one is going loco for it either.

Both Chancellor of the Exchequer George Osborne and U.K. Prime Minister David Cameron welcomed the positive figure but were careful not to sound too excited. The two policymakers said that more work has to be done but the figures show that the country is on the right track to recovery.

But whether they admit it or not, some political analysts say that the pick-up in economic growth for the quarter should give policymakers more confidence in the economy that it could handle more austerity measures in the coming months.

Some market junkies think that it will have the same effect on BOE policymakers too! Although BOE Governor Mervyn King already warned that recovery would be slow with the ongoing euro zone debt crisis and slowing growth in China, the GDP report didn’t stop market participants from speculating that further QE from the BOE is off the table.

This explains why Cable rallied on Thursday (as Big Pippin pointed out on his GBP/USD review) last week despite the overall risk aversion in the markets.

There are those who think that it could be nothing more than a flop though. They say that we shouldn’t rid of the prospects of further stimulus just yet. Naysayers already warn to not be surprised if the U.K. prints lower growth in the fourth quarter since there won’t be a lot of seasonal factors that would prop up the GDP.

But what do you think? Will the Q3 GDP report be enough to keep the BOE from launching more stimulus measures or not?

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>