Is it Sterling, is it Brexit? Nope – It’s snow. That was the verdict last week that the Bank of England gave on the Q1 2018 UK GDP figures which showed the UK economy barely crossing the line at just 0.12% QoQ growth; well below the 0.4% expected and the lowest since 2012. This of course prompted caution from the monetary policy committee which chose to keep rates on hold and wait to see “Whether the softness… Was due to the weather or the [economic] climate”.

 

Figure 1

The BoE’s official view is that this quarter’s surprise slowdown is just a blip in the data and that the underlying situation remains the same – weak economic growth and sparse sightings of real wage growth in an economy operating at near full capacity. After all, GDP figures are notorious for being revised only a few months after their release. It is too early to say for certain whether this quarter’s figures are an anomaly but caution is nonetheless warranted given that the Bank is acutely aware we are well into the cycle with a recession just around the corner. Many have been quick to criticize Mark Carney as the “unreliable boyfriend” who disappoints at the last minute but we take a different view: the BoE has made it clear that any rate rises are data-dependent and when it came down to it the data disappointed.

 

Despite the Bank’s official view, rather surprisingly data compiled by the ONS showed only a small effect on GDP from the snow related effects with the ONS saying:

 

“While the snow had some impact on the economy, particularly in construction and some areas of retail, its overall effect was limited with the bad weather actually boosting energy supply and online sales.”

 

Office for National Statistics

 

It is clear there are more factors at play here – not just in the UK but across Europe too. Many economic indicators have been flashing red, signalling that we may heading into another recession. Manufacturing, construction and retail all showed sharp contractions whilst services growth slowed. Perhaps the most telling indicator however is UK consumer credit lending which has fallen off a cliff (down 84% to just £254m in March) to levels not seen since 2012 and the financial crisis (even after seasonal effects are considered).

 

Figure 2

* Excludes student loans.

 

Another indicator, although old fashioned and more popular in the 1980s, is the money supply. Traditionally a very strong indicator of predicting a recession the Divisia index (money supply weighted by propensity to be spent) goes a long way to explain why growth has been sluggish over the past year and shows a consistent downward trend over the past 4 quarters. If you were in any doubt that this quarter’s figures were a one-off down to the bad weather this should convince you otherwise.

 

Figure 3

So how did markets react? Sterling suffered a sharp sell-off against the Dollar, falling from 1.3928 to 1.3758 and has subsequently fallen to 1.3583 after the BoE’s decision to hold rates at 0.5%. UK Equity markets were relatively quiet on the news, largely shrugging it off.

 

Our view is that macroeconomic factors and political risks are growing, prompting businesses and consumers to lose confidence and change their spending habits. Markets are currently not pricing in the risk of recession high enough and we expect to see at least one quarter of negative GDP growth this year; maybe even two. This plays into our wider bearish forecast for GBPUSD this year.

 

Author: Daniel Shearer