Currency watch: Growth surprise comes with a warning

UK GDP was released earlier this week and, for once, we got an upside surprise as construction and manufacturing spending proved to be the difference makers.

The 0.8% figure was lower than the previous quarter’s 1.2% and solidifies the fact that we are to see a significant drop off in growth as we move towards Christmas.

My local shopping centre is noticeably quieter than only a few weeks ago and will likely stay that way until the festive period as the electorate continues to digest the bitter pill that was the spending review.

The lower pound could help exports but it seems companies have not acted on this advantage yet. Likewise the strong expansion seen in Q2 appears to be based on rocky foundations. Mix this up with the fiscal squeeze and households bearing most of the weight in tax rises and you get a burnt-out recovery.
 
A side effect of the better-than-expected growth figure is that the market is now doubting itself as to how much quantitative easing it should price into UK assets.

While economists are quick to create the illusion that this is a painful process of estimation, the simple comparison is buying the wine for a dinner party; too little and the party never gets going and someone has to make the mad dash before closing time. Too much and we all know the feeling the next day.

I personally think the Bank of England will lean towards the ‘better safe than sorry’ angle. How it will affect the market, however, is anybody’s guess.

Jeremy Cook, chief economist at World First, 29.10.2010