It's official! The U.K. is back in a technical recession!
Unless you've been hiding in your secret basement preparing for the zombie apocalypse, then you'll know that the U.K.'s GDP contracted by 0.2% in the first three months of 2012. The number not only missed consensus of a 0.1% growth, but it also followed a 0.3% contraction in the last quarter of 2011.
Unfortunately for the U.K., many economic geeks consider two consecutive quarters of negative GDP growth as a technical recession. Duhn duhn duhn duhn.
According to the Office for National Statistics (ONS), construction activity and industrial production were the biggest party poopers for the U.K.'s growth. Output in the construction sector fell by 3% in Q1 2012, its biggest quarterly decline since Q1 2009.
Remember that the construction sector amounts to 7.6% of the GDP. The ONS added that output of production industries fell by 0.4% while the services sector (including the retail sector) only inched higher by 0.1%.
Apparently, cuts in public spending have also contributed to the sharp fall in construction output. Judy Lowe, deputy chairman of industry body CITB-ConstructionSkills, said that the cuts have left a hole too big for other sectors to fill. Public sector housing funds dropped by 25%, while non-public housing spending also shrank by 24%.
With all those details in mind, it's no wonder that GBP/USD fell by more than 50 pips at the first hour after the report's release! The pair was trading just above the 1.6150 handle before it dropped sharply and tested the 1.6100 support. Take note, however, that the pair also recovered its thanks to a dollar-bearish FOMC statement and risk appetite in markets. In fact, cable even ended the day higher than its open price!
Another factor that kept pound pairs afloat after the GDP release was the hope for an upward revision later on. That's right, several economic hotshots and market participants simply refused to accept that the U.K. is already in recession!
Although Prime Minister David Cameron remarked that the GDP reading was very disappointing, some BOE officials and economists insisted that the actual data was understated. For one thing, the manufacturing component posted a decline for the period even when recent business surveys reported an expansion in the industry.
Because of that, the number-crunchers down in Britain's Office for National Statistics (ONS) are being asked to explain the downbeat figures. The statisticians, however, maintained that the figures were more or less accurate but that the actual GDP reading could still be up for potential revisions later on. After all, the heavily-contested construction component was based on actual data for the first two months of the year along with estimates for the month of March.
Since the recently reported GDP figure was just the preliminary reading and the actual construction data for March has yet to be taken into account, several traders are counting on a considerable upward revision for the final GDP figure. Bear in mind that, if the GDP reading is revised up by 0.2% or higher, the double-dip recession in the U.K. would be nothing but a false scare.
This means that the BOE could still maintain its current stance, which turned slightly more hawkish than usual. Recall that one of their more dovish members, Adam Posen, recently left the bear camp and declared that the U.K. economy doesn't need further easing at the moment.
Aside from that, the BOE seems to be more concerned about their above-target inflation figures than the weaker than expected economic growth. An economic contraction wasn't exactly surprising for them as BOE Governor Mervyn King already noted that the first half of this year could be a bit rocky for the U.K. economy.
While the state of the U.K. economy seems to be up in the air for now, y'all should stay tuned for the release of the final GDP figures to see once and for all whether the U.K. double-dipped or not. I'll keep y'all posted!
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