I’ve been tapping the cable wires and word is that the 2nd quarter GDP data will be come in quite positive. Estimates are that the economy grew by 0.6%, double the growth posted the previous quarter. Time to down those pints of ale!
Not so fast there young fella! I keep hearing whispers that analysts actually believe that it might be all downhill after the second quarter. After this Friday’s report, some predict that we could see GDP take a hit in the coming months.
Experts are pointing to disappointing recovery across Europe as a potential stumbling block for the UK locomotive. Aside from that, the newly implemented austerity measures could very likely lead to decreased consumer demand as the consumers will be looking to save more. And of course, this doesn’t bode well for future growth.
Remember, the biggest thorn (or knife, if you prefer) in the UK’s side is its huge budget deficit. Because of the financial crisis, tax revenues from the housing and financial sector have fallen sharply. Welfare costs in the form of unemployment insurance also surged to high heavens as more and more people lost jobs. These two costs, together with the sizeable amount of money used in bank bailouts and stimulus measures, led to a massive surge in UK’s public debt levels last year.
And now, the UK has to pay the price by sacrificing and saving instead of spending. Way to rain on the GDP parade, Mr. Debt…
What’s worse is that, despite the proposed emergency budget plan last month, UK’s public deficit is predicted to suck even more. In fact, UK is forecasted to have the largest deficit among all the G7 nations for 2010. How bad exactly? Well, for every four pounds the government spends, it is expected to borrow one. In the long run, we may see the UK government have to implement stricter austerity measures, which could further dampen the outlook for the UK economy.
For now though, I’m sure the question that’s on every currency traders mind is this: what effect will tomorrow’s report have on the Pound?
Let’s have a quick look at the charts to see how the price action could play out depending on the results.
As you can see, GBPUSD has been moving inside a rising channel for more than a month already. It seems to be sitting pretty at the bottom of the channel, probably waiting for the GDP release. If the UK’s second quarter growth actually comes out twice as much as the 0.3% GDP reading for the first quarter, then GBPUSD could bounce and hit the top of the channel again. But if the results disappoint, the pair might be in for a breakdown.
Given how pessimistic analysts are for the future of the UK economy, I’m not too sure how upside surprisingly positive data will have on price. Chances are, if the reports fail to hit projections, we could see exaggerated pound selling!
Aside from their own deficit problems, the UK is also worried about euro zone’s fiscal prospects. The Brits are probably thinking that, if the euro zone tanks, the recent improvements in UK’s manufacturing and export sectors could soon be erased.
It doesn’t help that the US is also starting to worry about a slowdown in their economy as well. With all the big shot economies in the world expecting the worst, we just might see their fears come to reality. Then again, it can’t hurt to hope for the best, right?