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The GDP in the UK marked with high volatility (Daily analysis 10.12.2019)

10 Dec 2019 13:35|Bartosz Grejner

Data from the UK economy fail to meet expectations - the lack of GDP growth for three consecutive months represents the worst series in a decade. Data from industrial production and trade in goods also disappoint, underlining the high cost of Brexit. However, the pound is appreciating. The GBP/PLN exchange rate rises to nearly 5.11, reaching its highest level since April 2017.

Production on Isles is shrinking, and the deficit is growing

Two days before the UK elections, the Office for National Statistics (ONS) published a set of data on the British economy for October. Although they were not dramatic, they highlighted the cost of Brexit to Britain. For the third consecutive month, the British economy did not record any growth. Previously, such a series had happened a decade ago. After two months of decline in October, GDP remained unchanged, although the market consensus indicated an increase of 0.1%. This seems likely to confirm that the British economy will grow by less than 1% annually in 2019.

The other relevant data did not support the economic picture. Industrial production shrank by 1.3% on an annual basis (by 0.1 percentage points more than expected), and the deficit in the balance of trade in goods, reaching 14.386 billion GBP, turned out to be the largest since March this year and higher than expected by about 2.8 billion GBP. As expected, the impact of this set of data on British currency quotations was limited.

Thursday may be marked with increased fluctuations

In case of the pound, we can still observe the dominance of demand over supply - the GBP/USD exchange rate is just below the 1.32 level, and EUR/GBP is about 0.840, which is close to the lower level of the past two years. The GBP/PLN exchange rate, in turn, reached its highest level since April 2017, increasing to nearly 5.11. Optimistic sentiment towards the British currency results from the expectations of market participants that Prime Minister Boris Johnson and the Conservative Party will win the elections and finalise the Brexit before the end of January 2020. There will still be negotiations on a trade agreement with the EU (the current one expires at the end of 2020), which may be as difficult as the Brexit that has been present for three years.

So far, the market has not been so concerned about this distant perspective and is fully focused on Thursday's elections. On this day, we can expect significant fluctuations around the pound's exchange rate. The decision may be surprising. Such a surprise would be the coalition governments of the Labour Party, which does not have to win these elections. This could be connected with a few percent discounts of the pound in the short term, although the market and the polls show that the baseline scenario remains the victory and government of the Conservative Party.

In Germany hope and stability are present

The ZEW Institute published the December economic climate index for Germany. In the case of the German economy, it rose significantly above expectations to 10.7 points, the highest level since February. This is a result of the hope that private consumption can grow faster than expected. This would be justified based on solid export results in October, relatively high economic growth in the EU and a stable labour market. However, these positive sentiments and hopes may quickly change (or strengthen) depending on what happens after December 15th. The White House administration had set a deadline for a trade agreement with China on that date. If no agreement is reached, the USA will impose additional tariffs on Chinese goods, which is likely to worsen market sentiment again, also for Germany's highly internationally trade-dependent economy. Prof. Achim Wambach, President of the ZEW, said that "The rather unfavourable figures for industrial production and incoming orders for October, however, show that the economy is still quite fragile".

Negative sentiment with impact on the zloty

Until midday, the zloty remained slightly weaker. The Polish currency was negatively affected by the sentiment dominating on the broader market and the movement of capital towards assets perceived as safe. The zloty is now protected by a slightly weaker dollar, which lost about 0.2% to the euro in the middle of the day, and the EUR/USD exchange rate rose to about 1.1085, reversing most of Friday's decline resulting from better than expected data from the US economy. The calendar of important economic events planned for the rest of the day is practically empty, and no significant fluctuations are to be expected. The focus of market participants should already shift to tomorrow's inflation data from the USA and the evening statement and press conference of the Federal Reserve.

10 Dec 2019 13:35|Bartosz Grejner

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 acknowledgement of the source is prohibited.

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