The U.K. Dodges a Bullet

Earlier this week, it was confirmed that the U.K. had escaped a triple-dip recession in Q1 2013. The economy expanded by 0.3% in a quarter that was only anticipated to deliver a growth of 0.1%.

Truth be told, expectations were set pretty low for this report, as the markets had good reason to believe that the economy had contracted further in Q1. As I had mentioned in the past, harsh weather, downgrades from credit rating agencies, and downbeat economic reports all pointed to another recession for the U.K.

In fact, even BOE member Martin Weale himself warned the markets that the economy was at risk of posting negative growth, so you can imagine the markets’ surprise when they saw that the economy had grown at a pace three times faster than forecast.

Looking at the details, we see that the services sector contributed the most to growth last quarter. Britons were busy spending their dough in hotels and restaurants, which caused services to expand by 0.6% in Q1 2013.

Likewise, industrial production was up 0.2% thanks to a 3.2% rise in mining and quarrying. Unfortunately, the same can’t be said about the construction industry, which got hit with a 2.5% decline.

But what does this 0.3% growth mean really for the U.K.? Is it cause for celebration? Well, if you ask me, it’s a good start but it’s still far from impressive.

Many will be quick to point out that the U.K. practically erased the 0.3% contraction recorded in Q4 2012, not to mention avoided another recession with last quarter’s growth. Yes, it is relieving to know that the economy is still growing, but what they may fail to realize is that the U.K.’s output is still 2.6% below Q1 2008 levels.

Take note, the U.S., Canada, and Germany, are already producing output above their pre-recession levels. This tells us that despite the unexpected growth in Q1 2013, the U.K. is still lagging behind other major economies.

Now, that’s not to say the pound won’t see its fair share of gains over the coming days. After all, just one look at GBP/USD shows us how glad the markets were to see the latest GDP report. Within seconds of the release, price found itself over 100 pips higher.

GBP/USD Chart

The way I see it, the Q1 2013 GDP report should give the central bank a bit of breathing room and soften calls for the BOE to expand its asset purchase program.

Furthermore, I imagine that BOE Governor Mervyn King will have a harder time finding other policymakers to join him, David Miles, and Paul Fisher in voting for further easing. So all in all, this will probably provide GBP/USD with a bit of support, at least for the time being.