Currency Watch: Chancellor struggling to find excuses for GDP “disaster”

Last week’s preliminary reading of Q2 GDP was said to be “disappointing” by the Chancellor.

Going to the fridge and not finding any milk for a cup of tea is disappointing. England’s Euro 2012 campaign was disappointing. These figures were a disaster.

GDP slipped for a third successive quarter, smashing median forecasts of -0.2%, posting a staggering -0.7%. The Queen‘s Jubilee and poor weather weren’t going to fill the void. Similarly to Q1, construction was the main culprit, shrinking by 5.2%.

The sobering reality is that we have seen the economy shrink -1.4% since last September in which time we have seen £100 billion injected into the economy in the form of QE.

It questions the true effectiveness of monetary stimulus as a means to recovery. Further fiscal tightening isn’t the answer either. Shadow chancellor Ed Balls, wants to boost construction by building thousands of affordable homes, and increasing investment in infrastructure and offer tax breaks to spur investment and job creation.

We should see some bounce back in Q3 from the unwinding of the weather effects and Jubilee that seemed to weigh on the number and, although tickets were sold last year, the Olympics will contribute to this quarter’s growth.

The risk is that purse strings are once again tightened through Q4 results in a negative figure. This would fit in with our expected growth profile for the UK of oscillating around the 0% mark.

That being said, the impact on sterling has been fairly muted. GBP was due a retracement from its high levels versus the euro and this provided the perfect opportunity for it do so. We expect to see further consolidation around these levels through the coming months with obvious event risk potentially acting as a weight on the single currency.