Today’s data release saw December’s preliminary GDP print at 1.2%, slightly higher than expectations of 1.0%. This brought the overall Q4 reading into positive territory, with the economy expanding by 1% QoQ in the final quarter of the year.
However, the overall growth in the economy in the fourth quarter was a drop in the ocean when it came to offsetting the Q2 decline, leaving the economy some 7.8% below Q4 2019 levels and down 9.9% over the course of the year. This resulted in the largest annual decline in GDP being recorded since 1709 as the economy battled with the outbreak of the novel virus.
FX markets are all about the here and now, and in such a fluid economic environment, December’s GDP release was deemed too retrospective to prompt a severe market reaction. While the upwards surprise in the monthly data is very much welcome, it was almost made redundant by the knowledge that the economy receded again in the early parts of Q1 as national lockdown measures were implemented across the UK again. This is especially the case considering the largest upwards contributor to the December GDP release came from accommodation and food services – the industry that tends to get hit hardest by the tightening of lockdown measures.
This is highlighted within the Q4 data itself; services output increased by 1.7% in December, but fell by 2.4% in November as one-month national lockdowns were implemented.
Limited reaction in FX markets to GDP release as it is an imperfect measure of current conditions – sterling still sits near highs not seen since 2018 against the dollar
Author: Simon Harvey, FX Market Analyst