UK economy shows unexpected strength, dampens recession fears

Britain’s economy picked up more than expected in July, data showed on Monday, dampening fears that it will succumb to its first recession since the financial crisis as the Brexit crisis escalates.

Economic output in July alone was 0.3% higher than in June, the Office for National Statistics (ONS) said, marking the biggest rise since January and topping all forecasts in a Reuters poll of economists that had pointed to a 0.1% increase.

The pound inched higher against the dollar on the figures, which showed the expansion was driven by the dominant services sector − although the ONS said the underlying picture showed its growth weakening through 2019.

“While the figures are far from stellar, after a contraction in the second quarter the chances that we see a negative GDP print in the third have now dropped significantly, meaning that a technical recession will likely be avoided,” said David Cheetham, chief market analyst at online broker XTB.

The world’s fifth-biggest economy shrank in the second quarter, a hangover from a stockpiling boom in advance of the original March Brexit deadline. While most economists think modest growth will return in the current quarter, a slew of downbeat surveys has shown business activity wilting during the Brexit crisis, especially in August.

They point to a risk that the economy will contract again, which would officially herald a recession. The ONS said gross domestic product in the three months to July was flat compared with the previous three-month period. A Reuters poll of economists had pointed to a 0.1% contraction.

Last month, the Bank of England forecast that economic output would grow 0.3% in the third quarter, although its forecast for zero growth in the second quarter proved to be too optimistic. Besides the political crisis at home, the outlook for the economy has dimmed further because of trade tensions between the United States and China. Wednesday’s data showed the services sector, which accounts for almost 80% of British economic output, expanded 0.3% in July after four months of stagnation, the biggest upturn since November 2018.

Manufacturing output increased unexpectedly last month, rising 0.3% in monthly terms, while the construction industry also fared better than expected, posting a 0.5% rise in output. Separate figures showed the goods trade deficit increased in July to 9.144 billion pounds from 8.920 billion pounds in June, although this was still a little less than the 9.55 billion pounds deficit economists had forecast.

Sterling rebounded from early lows on Monday and headed towards a five-week high on Monday as surprisingly strong data and growing optimism that Britain will not crash out of the European Union without a deal boosted demand for the British currency. British Prime Minister Boris Johnson will try for a second time on Monday to call a snap parliamentary election, but is set to be thwarted once more by opposition lawmakers who want to ensure he cannot take Britain out of the EU without a divorce agreement in place.

“The threat of a no-deal Brexit has somewhat receded but has not gone away completely, which is reflected around current levels,” said Esther Maria Reichelt, a strategist at Commerzbank.

Against the dollar, the Pound gained 0.25% to $1.2321 after weakening 0.2% to $1.2233 earlier. It hit a one-month of $1.2353 last week.

Versus the euro, it also gained 0.25% to 89.48 pence.

Johnson last week failed to win enough support from lawmakers to call an early election and parliament also approved a bill which aims to block a no-deal Brexit at the end of October. That would force Johnson to seek a delay to Brexit.

Sterling had a rollercoaster week during which it plunged to three-year lows before rebounding strongly as lawmakers voted to block a no-deal Brexit.

In a note published late on Friday, strategists at Goldman Sachs raised the probability of a Brexit deal to 55% from 45% earlier and cut the likelihood of a “no deal” to 20% from 25% previously.

However there is some uncertainty on whether the EU will allow an extension, while the Daily Telegraph reported Johnson has prepared plans to legally stop any Brexit extension.

The uncertainty prompted hedge funds to unwind some of their negative bets against the British currency.

Speculative short positions on the Pound slipped in the latest week to 84,959, according to data from the US Commodity Futures Trading Commission.

The Pound also received a rare boost from surprisingly strong economic data.

Meanwhile, Eurozone bond markets sold off on Monday ahead of a big European Central Bank policy meeting this week that is expected to conclude with rate cuts and other stimulus measures to support the region’s sluggish economy.

Over the past week, investors have tempered expectations for an aggressive easing package - pushing bond yields away from recent record lows.

Agencies