Economic Insights

Economic Insights

The UK Q2 GDP slumped 0.7% q/q and 0.8% y/y, continuing the growth contraction for the third quarter.

It can be argued that extra holidays due to the Queen’s Diamond Jubilee caused lots of production activities closed.

However, weaker demand from the Euro Zone has shrunk the UK’s production in Q2 because the UK carries nearly 50% of its total export to the currency bloc. The rising inventory in the UK also signalled a weaker demand thus slowing down the production activities.

Source: Bloomberg

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Source: Bloomberg

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The UK economy is difficult to expand in a sustainable way as long as the currency bloc continues to cause jittery sentiment and thus dampen the confidence. That is not the worse event, as Moody’s statement earlier this week clearly hinted that Germany and the rest of the countries who are enjoying triple-A ratings are under their watch list. Gilt is currently preferred in the market at this time due to its AAA rating. If the UK’s credit system is infected by its neighbours’ contagion, a sharp withdrawal will raise the borrowing cost.

Gilts surged yesterday after the GDP announcement because traders were betting on a higher chance for the Monetary Policy Committee (MPC) to add on more stimulus which has already priced in the bond market, since the UK Consumer Price Index (CPI) suggested that the inflation concerns have eased at this time.

Source: Bloomberg

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I do not expect the Olympic Games is going to bring any significant impact to the deteriorating UK economy although there could a little. Also an improved job market was also mainly due to the job reaction by the every-4-year event. However, it is not sustainable. I am closely watching the developments below which are the key factors to rule the UK economy:

1. The Funding For Lending Scheme (FLS) effect, whether it can help boost business lending and comfort the banks’ funding supported by Her Majesty’s (HM) Treasury and the Bank of England (BOE)
2. Export figures to the Euro Zone

The Cable (GBP) is expected to be under pressure because further simulation has been expected.

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