According to the preliminary GDP estimate released in late October, in the third quarter of 2010, the U.K. economy grow at an astonishing rate of 0.8% quarter-on-quarter. The results mark the second strongest growth since early 2007 and imply that the economic recovery is now running above trend.
For the awesome figures, the U.K. owes many thanks to the services sector, which provides about 76% of its GDP. Services have made consistent contributions to GDP throughout the year. In fact, it just posted a 0.6% quarterly growth for the third straight time, and is now up by 2.1% from a year before.
We also saw heavy gains in the construction sector, which recorded a 4% rise in output during the quarter. Construction output boomed and increased 11% from a year earlier and is now at levels unseen since 1998.
Naturally, these cool figures earned plenty of praise from investors worldwide. Not surprisingly, the pound rose strongly in the days following the release of the preliminary GDP data. The fact that the U.K. was able to accomplish such a remarkable growth suggests that maybe there’s no need for further quantitative easing at the moment. As a result, the U.K. has earned the respect and a stable outlook from two of the top credit-rating agencies, Moody’s and Fitch.
Usually the preliminary reading has the biggest impact because it’s the first estimate.This time around, some naysayers think that the pound could go on a wild ride into the bear lair when the second version of the third quarter GDP is released on Wednesday at 9:30 am GMT. Remember that just like their American counterparts, our chaps in the U.K. release three versions of quarterly GDP report.
Initially, consumer spending was calculated to have been up by 1.1% in July before it was changed to 0.8%. It got worse in August when the figure was changed from -0.5% to -0.7%. Then, September’s retail sales were revised south from -0.2% to -0.5%. Lastly, the U.K.’s trade balance report for September showed that imports outpaced exports by 300 million GBP more than what was first reported at 8.5 billion GBP.
Unless you were napping in your Economics 101 class, you probably know that both consumption and exports, along with investment and government spending, contribute positively to GDP. Given these revisions, it’s not hard to imagine that we could be in for a disappointment.
If tomorrow’s revised GDP report reveals that the previously announced 0.8% growth was too good to be true, traders could start shedding pounds! No, I’m not referring to crash diets or fitness fads… I’m talking about a possible GBP selloff in case the revised GDP reading sees a huge downward revision!
Since a downward revision would reveal that the U.K.’s economic rebound was weaker than initially estimated, it could make people a tad more doubtful that the U.K. economy could sustain its recovery. And wouldn’t it be much tougher for the U.K. economy to keep expanding once the austerity measures take effect? Yikes!
It doesn’t help that the BOE’s monetary policy committee isn’t too confident with their country’s growth prospects. In their latest monetary policy tea party, a bunch of committee members expressed their concerns that the above-target annual inflation could soon hurt economic growth. Well, they do make a good point since increasing price levels could end up discouraging Brits from spending.