Saturday, October 24, 2009

UK GDP surprise gave markets a dose of reality

The UK GDP number for Q3 came in well below anything economists have expected. The UK economy, it seems, is less like that Germany and more like the US economy - driven by consumer spending and credit. The nation may also be lagging the US cycle - having entered the recession later and possibly taking longer to return to growth.

UK Real GDP %YOY (source: Bloomberg)

The currency reacted immediately, with a nearly a 2% GBP decline against USD. The UK quantitative easing will continue as the credit markets appear to be extremely tight. The chart below shows practically no growth this year in the UK's broad money supply, justifying the Bank of England money printing programs. This makes the British pound quite vulnerable, as the supply will continue to grow.

source: OECD, Bloomberg

The news propagated through the markets quickly. The dollar rose and commodities fell as traders lightened up on the carry trade. With that came the sell-off in the US equity markets. Is it possible the US GDP number will come in much weaker than expected as well? The UK numbers certainly left market participants quite concerned.
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