The British pound tumbled, 10Y gilt yields slumped and odds of a May BOE rate hike vaporized after the UK reported the weakest GDP print since 2012.
This morning, the UK’s Office for National Statistics reported that Q1 GDP rose just 0.1% Q/Q, badly missing expectations of a 0.3% increase, and the lowest quarterly increase since Q4 2012. On an anual basis, the increase was just 1.2%, also missing expectations of a 1.4% rise.
While analysts had had expected a modest slow down in growth to drop from the 0.4% growth in Q4 2017, the slowdown was far bigger than expected as snow hit retail sales and disrupted building work, and raises further questions over whether the Bank of England will raise interest rates in May.
According to the FT, a sharp fall in construction output was responsible for most of the slowdown. “The sector contracted by 3.3 per cent compared to the previous quarter. Analysts had expected the industry to bear the brunt of the poor weather.”
Following the news, UK money markets slashed their bets in half for a rate hike in May to 27% from 56% on Thursday. They now see the first rate increase this year in December, from November earlier.
Immediately following the data, which put the likelihood of a widely priced-in May rate hike by the BOE in doubt, the pound was hammered on the news, tumbling by 150 pips or 0.9% to 1.3791. Cable was already under pressure as U.K. Prime Minister Theresa May’s struggle to keep control of a Cabinet divided over Brexit doesn’t go unnoticed amid broad dollar strength
10Y Gilt yields similarly tumbled on the news, dropping 5bps to 1.45%.
So all this was due to a heavy snowstorm, which nobody could possibly see… take place over a month ago?
Apparently yes: chancellor Philip Hammond blamed the “Beast from the East” snowstorms as a key cause for the pullback. “Today’s data reflects some impact from the exceptional weather that we experienced last month, but our economy is strong and we have made significant progress,” he said in a statement. He was simply taking cues from Mario Draghi who yesterday blamed the European weakness on the timing of Easter and, of course, weather.
Refuting this ridiculous explanation, the ONS said that the impact of snow on output in the first quarter was estimated to be “relatively small” and “ the soft [growth] outcome reflects pockets of weakness more broadly across the economy.”
Rob Kent-Smith of the Office for National Statistics said:
Our initial estimate shows the UK economy growing at its slowest pace in more than five years, with weaker manufacturing growth, subdued consumer-facing industries and construction output falling significantly.
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.
According to the market, the figures will prevent BOE head Mark Carney from raising rates in May. The governor of the central bank Mark Carney has already suggested that weak inflation data and a smaller increase in wage growth than expected has reduced the pressure on the BoE to increase interest rates.
As for the drop in the pound, it has been exacerbated by the relentless resurgence in the dollar in the past two weeks, leaving the UK currency at its weakest point in close to two months.
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