Can the UK Keep Up?

While the US and euro zone have been posting notable improvements in their own GDP accounts, the UK barely managed to crawl out of the recession with a mere 0.4% growth during the last leg of 2009. Would they be able to keep this up for another quarter? The upcoming preliminary GDP report should give us an idea.

Come 8:30 am GMT tomorrow, the UK will release its preliminary GDP report. The expectation is that the country managed to grow again by 0.4% during the first quarter of 2010. Year-on-year, this would translate to a 0.1% decline.

Will the forecast hold? Well, I don’t want to sound all pessimistic here, but the six previous preliminary GDP reports came in worse than consensus. How’s that for a trend?

The UK’s recent economic data, however, seem to warrant the projected growth of 0.4% for the first quarter, as manufacturing and industrial production numbers in February were relatively strong. Manufacturing production grew by a 1.3% which was a lot better than the 0.7% estimate. Industrial production, which takes up about 17% of the economy’s total output, also outpaced the market’s 0.5% consensus with a 1.0% gain.

The UK’s negative trade balance also narrowed to -£6.1 billion, its lowest level in almost three years. During the same period, exports surged by 9.5% while imports had a marginal loss of 0.1%. The combination of a relatively weaker pound plus the developments in the UK’s trading partners has helped the country’s trade industry.

Another account that is pointing to growth in the UK’s economy is the 2.0% jump in retail sales in February. The latest figure came in more than twice the market’s forecast of 0.8%. Remember, retail sales is a leading indicator of the overall domestic consumption in the UK which just happens to take up about 76% of the economy’s GDP.

Still, I have a nasty feeling that even if the GDP figures hit the mark, it wouldn’t be enough to change the bearish sentiment towards the British economy. It’s just hard to ignore how the political uncertainties in the UK have been weighing the pound down recently. In fact, these political concerns could continue to be a drag on the pound even after the general elections on May 6!

As my buddy Pip Diddy keeps pointing out in his roundup, the latest election polls highlight the possibility of a hung parliament, wherein no political party holds majority of the seats. This could delay the passing of legislation designed to help the UK deal with its economic problems, especially its huge deficit.

With rumors circulating Trafalgar Square that tomorrow’s GDP report could come in worse than anticipated, how will traders react?

After double dipping last month, the GBPUSD pair has reacted strongly to shifts in risk sentiment. My gut is telling me that we may see a similar reaction once tomorrow’s report is released. If GDP figures fail to meet the 0.4% consensus increase, we could see wide spread pound selling across the markets. After all, like what I said in one of my previous articles here, it would just be another reason for traders to keep a bearish stance against the pound.

Of course, this may be exactly what the BOE wants. As I’ve said in one of my old blogs here, this would help the UK government service their debt easier, while giving UK exports a boost via a cheaper currency. So if we do see the pound drop like a brick, we may not hear a peep out of the BOE.

In any case, be careful and have those stop loss napkins ready – the reaction of the markets may just cause you to spill your tea!