U.K.’s GDP Goes Even Lower!

As was the case in the preliminary report, market analysts blamed poor weather conditions for the cooling down of the U.K.’s economy last quarter. The quarterly GDP was revised down to show a 0.6% decline, slightly worse than the 0.5% contraction in the initial report. Unfortunately, this marked the largest contraction since the 2nd quarter of 2009, and sparked fears of a potential double dip recession.

Digging deeper, we can find that the main reason why GDP took a hit to the gut was due dismal performances in construction, consumer spending and investment spending.

While construction was revised up from -3.3% to -2.5%, household spending dropped by 0.1% and was responsible for a 0.1% decline in overall GDP. But the biggest story was how capital expenditure was revised down from a -0.3% figure to a whopping -2.5% decline! This accounted for a 0.4% fall in the total GDP figure!

I could blame the weather for poor construction and spending figures (after all, who would want to build or shop when you’d just freeze your buttocks off?), but I am a little worried about the investment figures. This indicates to me that businesses are looking to spend less, which doesn’t bode well for future hiring and spending.

While this recent set of data is already giving Monetary Policy Committee (MPC) members bigger headaches, I think that it could’ve been much worse. Heck, government spending actually rose by 0.7%! This added another 0.2% to the GDP figures, and made the government the largest GDP contributor for the quarter. Now imagine the effect on GDP if the government actually fulfills its pinky promise to control spending!

For those of you tuning in to the MPC three-way battle, you’ll know that the latest GDP data is in favor of the doves who are refusing an interest rate hike. You see, higher borrowing rates could further weigh on economic growth as it usually discourages business and consumer spending.

On the other hand, the MPC also has to deal with high inflation that’s as persistent as Cyclopip‘s hobby of eating bunnies. The U.K’s inflation rate hit a whopping 4% in January, which is twice the BOE’s 2% target.

Recent events in the Middle East have also been pushing commodity prices higher, and are heightening inflationary pressures. This is probably why the BOE‘s chief economist Spencer Dale joined his bros Andrew Sentance and Martin Weale in their campaign for an interest rate hike at this month’s MPC meeting.

The battle is still not over though. The cast of hawks may have added another member, but I believe that the BOE will maintain its wait-and-see approach for at least a few more months until they get a better feeal of where the economy is headed.

Meanwhile, thanks to speculation that the BOE will raise interest rates, Cable has been on the rise for the past couple of months. But the disappointing result of the country’s most recent GDP report could give the bulls a reason to think twice before taking Cable any higher.

GBP/USD Chart

What we need to watch out for now is the next GDP report, whether it comes out positive or negative. If the U.K. manages to avoid falling back to recession, that is, printing a positive GDP, chances are we’ll see at least a rate hike by the end of the year and help Cable rise.

On the flip side, if U.K. economy plunges back to recession, then we could see Cable drop back to former lows around 1.5500. Let’s hope that doesn’t happen… The last thing the world needs is more bad news!