Disappointing Business Investment Data Weighs On Pound

Yesterday, the second estimate of UK Gross Domestic Product, or GDP, for the fourth quarter indicated underlying strength in the British economy, despite uncertainty caused by the country’s decision to leave the EU. Whereas most economists forecasted more pronounced negative consequences, quarterly GDP has grown by 0.7% since the third – higher than the first estimate of 0.6%. Most of the difference between the first and the second estimates has been attributed to better-than-expected results from the manufacturing sector.

 

Strong consumer spending

Final household consumption expenditure has also been strong, contributing 0.4 per cent of GDP in the last quarter of 2016. Consumer expenditure is universally seen as a key indicator, since it accounts for around 60% of the expenditure that comprises GDP. Companies invariably plan their inventory, hiring and investment strategies according to levels of consumer spending and confidence. Consumer spending numbers, derived from recent retail sales figures, show that growth accelerated before Christmas, most likely driven by increased public confidence.

Weaker business investment

Between Q4 2015 and Q4 2016, business investment decreased by 0.9%. Even though Q4 GDP was revised up, business investment fell 1% compared with the third quarter, the first fall since the start of the year. This is the first annual decrease in business investment since 2009, mainly because of weak investment in buildings and structures, as well as in information and communication technology (ICT) equipment and other office and industrial machinery.

The pound retreated from two-month high against the euro

The EUR/GBP currency pair fell to a two-month low at 0.84029 before heading back up. Political uncertainties in Europe are weighing on the European currency, with vital elections due to be held in France, Germany and the Netherlands. Compared to the DAX30 for example, the French index (CAC40) has been underperforming since the beginning of the year. Yield on French sovereign bonds, however, have increased, with the possibility of a Marine Le Pen presidency driving investors towards safer assets.

According to the American bank, JP Morgan, the euro could lose up to 10% of its value in the event of victory for the Front National candidate. Marine Le Pen is in favour of a France under fewer EU constraints – especially from what she has called “German domination”.

If Marine Le Pen enters the Élysée Palace, it will represent an even bigger political event than the Brexit vote. She compares the Eurozone to a prison, and has indicated that “Frexit” might also be on the cards. As she said to the Daily Telegraph: "What is the point in punishing a country? It is senseless, unless you think the EU is a prison, and you are condemned if you escape. I want to rebuild our damaged relations with the United Kingdom".