U.K. Defies Gloomy Expectations! No Recession in 2012?

The U.S. ain’t the only economy driving analysts loco by defying their expectations, ya know. Across the Atlantic Ocean, the United Kingdom is also off to a good start for 2012, printing one positive report after another. In fact, the recent figures we’ve seen have been pretty impressive that some analysts are saying that the country may even avoid a recession!

The U.K. is no stranger to gloom-and-doom talks. Back in August of last year, I blogged about how several signs of weakness in the economy had British officials bracing for the worst. Chancellor of the Exchequer George Osborne said that he was upset with the labor conditions in the country. Meanwhile, the negative reports had even the most hawkish of the BOE members shifting their stance on monetary policy, passing up the chance to call for an interest rate hike.

But it seems like times have changed. As surprising as the news of Katy Perry and Russell Brand’s divorce, we started 2012 with a handful of better-than-expected economic reports from London. Let me give you a recap.

First up was the Manufacturing PMI report for December. According to a survey conducted by think-tanks Markit Economics and the Chartered Institute of Purchasing and Supply (CIPS), growth in the manufacturing sector topped forecasts when it printed at 49.6. The consensus was for a pullback to 47.4 from November’s 47.7 reading.

And it wasn’t just the British manufacturers who had a good month in December! The Construction PMI report also beat expectations when it came in at 53.2 following November’s 52.3 figure. The twelfth consecutive month of expansion in the sector might have surprised a few economic gurus who predicted the index to clock in at 51.8. Digging deeper into the report, I found out that the rise in new businesses was a significant factor in spurring activity in the sector.

Then there was the Services PMI report which fosho impressed a handful of market junkies. It showed that service industries, including those involved in accountancy, transportation, legal service, and hairdressing, grew at their fastest pace since July 2011. The index printed at 52.1 for December after tapping in at 51.3 in November. Because the sector comprises 75% of GDP, the report has analysts revising up their forecasts for the U.K’s Q4 2011 GDP. Previously, they said that we could see stagnant growth in the last quarter of the year, but upon seeing the positive Services PMI, some are saying that it’s possible for the economy to have grown 0.4% in October to December 2011. Sweet!

Does this mean the U.K. is safe from another recession?

Err, I wouldn’t get too excited about that just yet. From what I’ve gotten from a few naysayers, with banks planning to be stricter in giving out credit and government spending still limited by austerity measures, there’s a good chance that the British economy has yet to see the worst.

On top of that, there are also external factors to growth that we have to consider. It’s no secret that the euro zone is still grappling with its debt crisis. Because the region is the U.K’s biggest export market, the repercussions of its financial fiasco are likely to spill over to the British economy too.

This is probably part of the reason why the pound was not able to hold on to its gains against the dollar despite the positive PMI reports.

GBP/USD 1-hour Chart

As you can see on the chart, GBP/USD wasn’t even able to go beyond resistance at 1.5650. If you’ve been reading Pip Diddy’s daily forex fundamentals reports, you probably know that concerns about the debt crisis have once again escalated on not-so-impressive bond auctions and news that banks are very cautious lending out cash.

Then again, that’s only my opinion. If you’re still planning to buy the pound though, it might be best for you to keep your fingers crossed for positive news to come out of the euro zone and not just the U.K.