UK GDP contracts by 0.4% – pound dives

Data this morning has run significantly against market expectations, confirming that Britain is still in a recession. The UK’s third quarter GDP figure was revealed to be a 0.4% contraction, which now means that the UK has suffered 6 consecutive quarters of negative growth. Market participants had speculated that the UK economy would grow by 0.2% in the months from July to September and had taken the pound slightly higher this morning.

There has been data recently though that points to this disappointing figure. Data in early Ocotber revealed that manufacturing production had fallen by 1.9%, significantly below forecast and this has clearly weighed heavily on overall output. In addition, yesterday’s UK retail sales figures, showed that there was no growth in High Street activity in September, which was a further warning that the economy may not yet be expanding.

Investors will now be looking ahead to the Bank of England’s next policy meeting on the 5th November, where the members will have to seriously consider the possibility of extending their asset purchase scheme. Recently, we have seen G20 countries preparing to make steps to remove monetary stimulus measures as the global recovery strengthens, however the BoE still clearly has a long way to go before such steps can be taken. Even dovish market participants were not expecting Britain’s economy to have contracted by as much as 0.4%, a figure that truly underlines the fragility of the recovery.

As the news was reported, the pound dropped a full percent against both the euro and the dollar, as investors hurried to sell their sterling. Looking to the short and even medium term, the UK currency will remain under heavy selling pressure, with confidence in the economy shot. That we are still in a recession and with the possibility of further QE now back on the horizon, investors will see little hope of an interest rate rise in Britain even into 2010, which will heavily on the value of sterling.