Overview and expectations September 10, 2018 including UK GDP
This overview highlights the most important economic events taking place today: UK GDP and manufacturing production. Analysts’ expectations and how traders can benefit from the possible outcome are also analysed
Today’s overview and expectations focuses on UK GDP (Gross domestic product), manufacturing production and UK earnings. All three sets of data affect the markets and traders can benefit by anticipating those effects and trading accordingly.
UK GDP FORECAST AT 0.4% FOR Q3
Gross domestic product (GDP) is the market value of finished goods and services a country produces in a time period. GDP is usually calculated on a yearly basis, but it can be calculated quarterly as well.
A higher than expected reading is generally positive for GBP, while a weaker than expected reading is negative for GBP.
UK GDP increased by 0.4% in the second quarter of 2018 in comparison to the previous quarter. The UK’s growth rate bounced back in the second quarter from 0.2% at the start of the year. The third quarter is set for 0.4% growth which is based on a faster service sector growth. This reflects the extent to which the economy has become more dependent on services to support growth, particularly a very strong financial service sector.
Financial Times research has shown that by the end of the first quarter the UK economy was about 1.2% smaller than it would have been without the Brexit vote. The referendum inflicted damage because incomes were affected due to the 10% drop in GBP which drove up import prices.
According to the latest analysis by UBS, the UK’s exit from the EU has already cost the UK a chunk of its economic output. It is already 2.1% lower than where it would have been without Brexit.
If actual GDP figure differs significantly from the forecast, traders can expect a strong market reaction. If GDP is lower, GBP is likely to weaken and if it’s higher it is bullish for GBP.
MANUFACTURING PRODUCTION GROWTH SLOWS TO 2-YEAR LOW
As a result of Brexit uncertainty and the US-China trade war, IHS Markit’s report showed that the UK Manufacturing PMI fell to just 52.8 in August compared to 53.8 in July and significantly lower than analyst expectations of 54.2. That’s the lowest reading in 25 months and shows the sector moved closer to stagnation last month. Anything above 50 indicates an expansion while below means a contraction.
Manufacturing production refers to the methods used to manufacture and produce goods for sale most efficiently. A higher than expected reading is seen as positive for the GBP, while a lower than expected reading is seen as negative for the GBP.
Manufacturing production growth was 0.4% last month (August) versus 0.3% expectations and 0.6% booked in June. July’s figure for May was the same at 0.4% versus 0.9% expectations and -1.3% booked in April. This month’s forecast is 0.3% growth.
Foreign demand declined for the first time since April 2016 amid reports of slower global economic growth and the increasingly uncertain trading environment. Economist Andrew Wishart at Capital Economics said that there was very little indication of recovery in the manufacturing sector.
If the actual figure for this month’s forecast differs greatly from analyst expectations, traders can expect increased volatility in the markets.
UK AVERAGE EARNINGS INDEX
Looking ahead to tomorrow’s release (September 13) regarding the UK Average Earnings Index. This calculates variation in the price of labour that companies and government pay, including bonuses. The data is used as an indicator of income growth during a given time. Readings that are higher than expected should be considered as bullish for GBP. Lower readings are bearish for the currency.
The UK’s Average Earnings Index reading has dropped over the past 3 months from 2.6% in June to 2.5% in July to 2.4% in August. Recent market instability caused by uncertainty of a hard or soft Brexit could have been the cause for the drop. The bearish change indicates a weakening for GBP.
According to UK Office for National Statistics, the drop was lower than the expected 2.5%, having an actual reading of 2.4% showing a bearish change for the GPB. As negotiations between Brussels and London are ongoing, uncertainty remains over Brexit’s outcome and the aftermath. If expectations fall short from actual reading this will most likely lead to an increased volatility in the market, creating more opportunities for traders.
For more information about how data releases affect markets and how traders can use them to make investments, contact FXB. Learning how to interpret data releases is one of the keys to successful trading.