Hello, forex chaps! The U.K. will be releasing its GDP report this Friday (April 28, 8:30 pm GMT). There’s therefore a good chance that the pound may get a volatility boost. And if you’re planning to trade this top-tier report, then you better gear up by reading up on today’s Forex Preview.
Oh, for those who don’t know, there are three kinds of U.K. GDP reports: (1) the first or preliminary report, (2) the second estimate, and (3) the final GDP report. And as it says on the title, the upcoming GDP report is the first or preliminary estimate.
The first or preliminary report, as the name suggests, gives the earliest peek at the overall economic activity in the U.K., so it usually generates some volatility. However, the preliminary GDP report is also the least accurate and is often subject to revisions.
How did the pound react to Q4 2016’s preliminary estimate?
The U.K.’s preliminary report for Q4 2016 GDP growth was released back on January 26. And it managed to beat expectations, since GDP grew by 0.6% quarter-on-quarter (+0.5% expected) and 2.2% year-on-year (2.1% expected).
On a slightly more downbeat note, the year-on-year reading for Q3 2016 GDP growth was downgraded from +2.3% to +2.2%. Still, the +2.2% reading for both Q3 and Q4 were the shared highest since Q2 2015.
Only the output approach is used in the preliminary GDP report. And digging through the details of the report, the service sector was the one and only driver for quarter-on-quarter growth.
Industrial production had no positive contribution to GDP growth because the 0.7% increase in manufacturing output (-0.8% previous) and 3.9% increase in utilities production (-4.2% previous) were offset by the 6.9% slump in mining and quarrying output (+4.3% previous).
Having said that, the biggest driver in the service sector was the the business and financial services industry, since it accounted for half of quarterly GDP growth. The retail and wholesale trade industry, hotels, and restaurants were also major drivers, accounting for 0.2% of quarterly GDP growth. As for the remaining 0.1%, that came from government and other services.
The above mentioned service industries were also the major drivers for the year-on-year reading, with the business and financial services industry accounting for 1.0% (or almost half) of annual GDP growth. Meanwhile, the retail and wholesale trade industry, hotels, and restaurants, had a positive contribution of 0.8% to annual GDP growth.
The stagnant industrial production was a bit disappointing. But overall, the U.K.’s preliminary Q4 2016 GDP report was actually pretty good. And as mentioned earlier, both the quarter-on-quarter and year-on-year readings were able to beat expectations.
However, the pound reacted by trying to climb higher before getting swamped by sellers and steadily declining across the board. What’s up with that weirdness?
Well, Brexit-related events apparently had more weight on the pound’s price action at the time.
To be more specific, the pound found buyers on January 24 when Brexit Secretary David Davis promised that Parliament will have “great influence” on the Brexit process before the Brexit Bill was rolled out.
However, the Brexit Bill, which was revealed shortly after the GDP report was released, happened to looked like this:
And it made many MPs come out and complain because the structure of the Brexit Bill and the tight schedule for debates made introducing amendments difficult. And that naturally heightened Brexit-related uncertainty at the time, so pound bulls apparently used the GDP report as a reason to unwind their bets rather than as a reason to add to their bets.
Of course, all that Brexit Bill stuff is history now since Article 50 of the TEU was already triggered. But at least you got a refresher as to why the pound didn’t react the way it normally does.
How did the final estimate for Q4 2016 GDP end up?
The upgraded reading was thanks to industrial production adding 0.1% to quarterly GDP growth. And as mentioned earlier, industrial production had zero contribution to GDP growth in the first estimate. The positive contribution from industrial production, in turn, was due to manufacturing output being higher than originally estimated (+1.2% vs. +0.7% originally).
Unfortunately, the year-on-year reading for Q4 GDP was downgraded from +2.2% to +2.0%, and then downgraded again to +1.9%, thanks largely to annual service sector growth actually being weaker than originally estimated.
The breakdown using the expenditure approach was also made available, and quarterly growth was driven by net trade, which added 1.7% to total GDP growth. Meanwhile, consumer spending weakened a bit, adding only 0.4% to GDP growth (+0.5% previous). These drivers were partially offset mainly by gross capital formation, which subtracted 1.6% from GDP growth.
Year-on-year, consumer spending was the main driver, accounting for 1.8% of GDP growth. The main drags, meanwhile, were trade (-0.5%) and gross capital formation (-0.3%).
What’s expected for Q1 2017’s first GDP estimate?
The general consensus among economists is that Q1 GDP only expanded by 0.4% quarter-on-quarter, which is slower than Q4 2016’s +0.7% rate of expansion. Meanwhile, the year-on-year reading is expected to advance by 2.2%, accelerating from Q4’s +1.9%.
The National Institute of Economic and Social Research (NIESR) forecasts that Q1 GDP grew by 0.5% quarter-on-quarter, which is a tick higher than consensus. And according to commentary from NIESR, “growth slowed slightly in the first quarter of 2017 to 0.5 per cent. A key component of this moderation has been relatively weak retail sales in the first two months of this year.”
As for the BOE, its upgraded staff forecast is that Q1 GDP grew by 0.6%, as noted in the March BOE statement.
Looking at the available GDP components, total industrial production fell by 0.3% in January and then fell again by a much harder 0.7% in February. And the slide in industrial output was broad-based to boot, which will likely drag down on the quarter-on-quarter reading.
Year-on-year, however, industrial production increased by 3.3% in January and then 2.8% in February, which seems to support the consensus for a faster year-on-year reading.
Only the output approach is used for the preliminary report, and we won’t get a breakdown using the expenditure approach until the second estimate, but some components of the expenditure approach are already painting a not-so-upbeat picture, at least for the quarter-on-quarter reading.
To begin with, the U.K. printed a trade deficit of £2.98 billion in January and £3.66 billion in February. In contrast, the deficit for all of Q4 2016 was only around £4.76 billion.
Retail sales also plunged by 1.8% month-on-month in March and total retail sales for Q1 2017 (seasonally adjusted) amounts to £102.69 billion, which is less than Q4 2016’s £104.15 billion, so consumer spending likely took a hit in Q1.
Overall, the available reports seem to be pointing to a slowdown in Q1 GDP growth, at least on a quarter-on-quarter basis. And as usual, just keep in mind that better-than-expected readings tend to cause a quick pound rally while worse-than-expected readings trigger a quick pound selloff.
Also, just note that the pound has a rather strange tendency of moving minutes or even hours ahead of data releases, particularly off top-tier ones. As Pip Diddy noted in his April 21 London session recap, for example, the pound began sliding 30 minutes before the disappointing retail sales report got released. This also happened about an hour before the preliminary estimate for Q4 2016’s GDP growth was released. You can even see it on the chart earlier.
A Reuters report, which you can read here, points to the possibility of leaks. Although it’s also possible that market players are just innocently opening preemptive moves (and being right most of the time). Anyhow, just keep that in mind and trade safe, alright?