12 Feb 2019: Falling investment hits UK GDP

Falling investment hits UK GDP

February 11th: Highlights

  • UK Economic growth of 0.2% in Q4
  • U.S./China concerns drive safe-haven dollar buying
  • Euro closes at lowest level since November

Brexit concerns push GDP growth to its lowest level since 2012

Sterling fell to a low of 1.2844 versus the dollar yesterday as the GDP data for Q4‘18 showed that the economy slowed by more than expected, growing at just 0.2%.

Data for manufacturing production, industrial output, and total business investment all fell by more than analysts predicted as the concerns over a no deal Brexit hit home. Nothing that has happened since the turn of the year will have improved matters as the Government has continued to flounder in its efforts to try to agree on a change to the Northen Irish backstop plans with Brussels.

Manufacturing production fell by 0.7% in December leading to a year on year fall of 2.1% Industrial output was 0.5% lower, contributing to a year on year fall of 0.9%.

Business investment, which has been steadily falling since the Brexit referendum, fell by 1.4% in the fourth quarter and by 3.7% year on year.

The data was a timely reminder to MPs that the clock isn’t just ticking down now but it is very close to expiry. The fact that the Prime Minister intends to ask Parliament for more time yet again to try to convince Brussels to even re-open negotiations let alone agree to a change to the Withdrawal Agreement shows just how out of touch the Government has become with the concerns of both business and individuals.

Last weeks MPC meeting lowered the Bank of Englan’s growth forecast to just 1.2% in 2018 but that will be impossible to achieve should the UK crash out of the EU with no deal. It will be tough even if the Government decides to extend the triggering of Article Fifty by two or three months from March 29th unless there is a positive outcome expected.

The overall GDP growth for 2018 was 1.3%. This was significantly lower than had been predicted at the start of the year despite concerns over Brexit being very well known.

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Dollar rallies as concerns over trade talks lead to buying

The greenback’s safe-haven appeal led to solid buying interest yesterday as the market reacted to concerns over friction between the U.S. and China and a fear that the latest talks between the two powers will end with no draft agreement.

These concerns have added to a belief that a significant slowdown in global growth which will hit emerging economies hard is already happening.

The IMF sees global growth at 3.5% in 2019 and 3.6% in 2020 in its latest report. This is lower by 0.1% and 0.2% since the previous forecast which was released last October. It is impossible to overestimate the significance of a return to the smooth running of the relationship between Chian and the U.S. since the knock-on effect of further tariffs or anything more serious will damage global growth even more.

The dollar index rose to a high of 97.12 before closing right on the resistance line at 97.06. This continued a run of eight consecutive higher daily closes. That eclipses six consecutive closes last September.

This evening’s speech by Fed Chairman Jerome Powell is unlikely to give us any further update on the Bank’s monetary policy pause. The data released since the meeting and the expectations for the remainder of this month are in line with the guidance given by the FOMC. It is likely that the Fed’s pause will last at least until Q3 when a clearer picture of the rate increases throughout last year will be seen.

Benign neglect “not going to cut it” for ECB

The members of the monetary policy committees of the Central Banks of the U.S., UK, and Eurozone all seem to be in unison with one another as they battle with a multitude of issues.

The Fed has chosen to pause its rate hike cycle despite speculation that it is more than a pause, the BoE is hoping that it may be in a position to hike later in the year but fears that the next move may be lower to support the economy following Brexit. The ECB meanwhile continues to favour a policy of benign neglect which it has adopted for some time now.

Despite the calm exteriors exhibited by Mario Draghi at the most recent ECB meeting and Benoit Coeure last week, there must be some calls for action to arrest the slide in economic activity. A wringing of hands and an air of confidence will not encourage investment and with even Germany, the region’s economic powerhouse, suffering the time for action is fast approaching.

In his comments last week, Coeure mentioned that the ECB has tools available to arrest the slide but if they are ineffective the ECB is sufficiently creative to create new ones.

This is most likely a reference to the return of the Asset Purchase Plan which was ended last month. Additional liquidity may encourage banks to lend, but given the size of the bad debt portfolios they are still carrying form the last “downturn”, they may be more reticent this time around.

Eurozone banks have bad loans of around EUR 2.4 trillion which the ECB has so far pretty much ignored. But if that figure starts to grow it is likely that there will be forced mergers and banks will disappear. One effect of the downturn is that banks have withdrawn behind national borders which fly in the face of the benefit of cross border lending which is a plank of EU policy.

The euro is suffering from the ECB’s benign neglect although its fall is a welcome development for those looking to export growth as a way to avoid a serious recession. It may need to fall by a further 5% to really help and that means a break of 1.1000.

Yesterday the single currency fell to a low of 1.1267 and closed at 1.1276 as it mirrored the dollar’s recent record.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”