Pound-to-dollar rates fall on disappointing UK economic growth figures for May

– GBP Dips Following Economic Data Release
– British economic growth slows
– Economists say Covid surge is to blame

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The UK economy grew 24.6% in the year through May, an impressive figure flattered by the economic crash a year earlier but still weaker than the 25.9% expected by the market.

The disappointment sparked some weakness in the pound’s exchange rates, with the pound-to-dollar exchange rate (GBP / USD) falling to a low of 1.3765 within minutes of the release, with economists saying the disappointment can be attributed to the increase in Covid-19 cases. in the countryside.

Between May and May, growth was 0.8%, almost half of the 1.5% forecast. The three-month average GDP growth in May stood at 3.6%, which is below the 3.9% expected by the market.

In fact, all the data dumped by the ONS This Friday disappointed, confirming that the rebound in UK economic growth is starting to disappoint compared to expectations.

For currency markets, this is potentially important given that currencies trade under a regime that places more emphasis on economic growth differentials and central bank monetary policy.

Indeed, the pound fell within minutes of the release:

The British Pound Rate Against The Dollar Declines

Looking at the various other figures from the ONS, industrial production for May stood at 20.6%, which is lower than the 21.6% expected by the market.

Manufacturing output for May was 27.7%, below the 29.5% forecast.

According to the ONS, the British economy remains 3.1% below its pre-pandemic level:

UK Economic Growth ONS

“The May GDP report is a bit of a cold shower for those who expect it to return to its peak in the third quarter,” said Samuel Tombs, UK chief economist at Pantheon Macroeconomics.

“Outside of the hotel industry, little momentum. The rise in Covid cases indicates a slowdown in growth in June,” he adds.

Economists who follow the weekly data releases have noted a marked slowdown in growth rates in recent weeks and many attribute the development to the increase in Covid-19 cases in the UK.

The UK is currently experiencing a third wave of infections with 32,500 new cases reported on July 08.

The increase in cases means that more of the productive workforce is being asked to self-isolate through the contact tracing system, while it also hurts consumer and business confidence.

“The UK economy has had a great second quarter, but rising Covid-19 cases threaten to push the pause button of the recovery over the summer,” said James Smith, developed markets economist in ING Bank.

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“The moderate increase in GDP in May is particularly disappointing at a time when some more timely indicators suggest that the economic recovery lost some more vigor in June. This may mean that the recent increase in COVID-19 cases and the delay in the final easing of COVID-19 restrictions is hampering the recovery, ”said Paul Dales, UK chief economist at Capital economics.

Pound sterling live reported this week that forex strategists at German Bank were taking a more cautious stance on the pound sterling in the coming weeks as they expect the increase in Covid-19 cases to cast a shadow over the UK’s economic recovery.

An assessment by Deutsche Bank reveals that the increase in Covid-19 cases in the UK could negatively impact consumer confidence in the coming weeks, which in turn will weigh on spending and, in turn, ultimately, on economic activity.

“We are more concerned that any minor direct boost from the July 19 reopening will be offset by the indirect ripple effects of the exit wave, with problems on both the demand and supply side.” said Shreyas Gopal, strategist at Deutsche Bank.

“There is a link between increasing case rates and consumer confidence, although vaccinations are well understood to significantly reduce the risk of serious illness,” Gopal explains.

Covid Gopal case

Above: “UK consumer spending is stable but not ‘gangbusters’ as Covid cases rise” – Gopal.

“There is also a growing risk that consumers will start to ‘go with their feet’ and reduce socialization again when cases are high. And this may be one of the factors contributing to the recent leveling off of high-frequency data in the country. UK Data on mobility and spending have come off recent highs, ”says Smith.

Looking ahead, ING expects positive third quarter growth of around 1.5%, especially since the government is unlikely to enact further restrictions.

The government pledged earlier in the week to fully reopen the company on July 19 with final confirmation likely on Monday.

“We would still say that the outlook beyond the summer looks reasonably good, assuming that no significantly evasive vaccine variants emerge in the short term,” Smith said.

ING predicts that the size of the economy will return to more or less pre-virus levels by the end of the year.

Due to the slowing economic recovery in the UK, Capital Economics says it is now pushing back the point at which the economy returns to its pre-Covid size.

“We didn’t expect it to slow down so soon so soon. As such, while we previously thought GDP would return to its pre-crisis peak in August, October now seems a better bet,” he said. said Dales.

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