Brexit and Germany’s GDP (Daily analysis 15.01.2019)

15.01.2019 12:04|Bartosz Grejner

The pace of German economic growth in 2018 was the slowest in five years. Consumption growth was only worse five years ago. The euro was under pressure. However, today, the events in the UK are among the most important. Extreme volatility of the pound can be expected, although within a few months, the British currency may gain significantly.

EUR/USD close to falling below 1.14

In the morning a relatively strong depreciation of the euro was observed. The EUR/USD quotations fell from around 1.147 to 1.142. This was more or less coinciding with the publication of Germany's GDP for 2018 and the beginning of the press conference of the German Statistical Office (Destatis). Economic growth was 1.5% year-on-year and was the slowest in five years, but this was in line with the economists' expectations. After a fall in GDP in the Q3 (quarter-on-quarter), Europe's largest economy recorded slight growth in Q4, but data for this period will be published on February 14th.

An important factor influencing such a weak result for the whole of 2018 was the final consumption expenditure of households and NPISHs. Taking into account the impact of inflation, price-adjusted consumption grew only 1.0% year-on-year. This is the lowest growth pace in five years. The contribution of this consumption to economic growth in 2018 was only 0.5 percentage points, while in the previous three years it was in the range of 0.9-1.1 percentage points.

Apart from the general slowdown in economic growth pace in the region, the decrease in production in the automotive sector (12% in Q3) was also a significant factor, caused by introduction of new emission standards. This affected the automotive-related sectors in the economy, and since it is one of the main driving forces of the German industry, it had a spillover effect on other industries as well.

The critical moment on the Isles

The German GDP publication will not be the main event of the day. The evening vote on the Theresa May government's Brexit plan will be undeniable the key issue on Tuesday. It is almost certain that Theresa May will lose the vote today in the British Parliament. For the pound, the extent of the defeat will be important - the lower it will be, the greater the chance of reaching a compromise on key issues (mainly the backstop of the Irish border). A difference of less than 60 votes may also mean that the EU will be more willing to make concessions to enable the plan to be voted through.

According to recent reports, around 150 British parliamentarians can vote against May, which would mean that the plan is practically buried. Such a scale of failure would also be the largest in the British Parliament in more than 100 years. In effect, this also opens the way for new elections or even a second referendum. The pound would probably also depreciate significantly in such a scenario. In the long run, a positive thing for the British currency is that almost no one wants a chaotic Brexit, i.e. without an agreement with the EU. In the next few months, the pound may gain as much as 5-10%.

However, things can look a bit different in the coming days or weeks. The most likely scenario now seems to be May's failure with the difference of 60-150 votes. This may translate into a turmoil characterised by high volatility of the pound due to uncertainty about further developments (e.g. compromises in the May plan, a vote of no confidence for the government, new elections, second referendum). The volatility of the British currency may reach a few percents during this period, being even higher especially this evening when the results of the vote will be known.

This also translates into significant fluctuations of the pound in relation to the zloty. The GBP/PLN exchange rate was within a relatively narrow range of 4.815-4.836 until midday. Depending on the results of the vote, the GBP/PLN fx rate may extend even beyond the range of 4.70-4.90. In the case of the zloty’s whole basket, the impact of events in Great Britain should be limited, although voting results on the extreme ends may also have an effect: losing the vote by a small number (60 and below) may strengthen it, but a very large margin (over 150) may weaken it.


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This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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