Sterling gained ground in Europe on Wednesday despite data suggesting that the UK economy is recovering more slowly than previously and remains highly unbalanced.
Gross domestic product rose by 0.4% in the July to September period, instead of the 0.5% previously estimated, the Office for National Statistics reported. Growth in the previous three months was also revised down, to 0.5% from 0.7%.
“The quarterly national accounts suggest that the economic recovery has less momentum than previously thought and still looks worryingly unbalanced,” writes Ruth Miller, UK economist at Capital Economics.
“The national accounts show that the economic recovery has lost even more pace than previously thought, and the meagre 0.1% month-to-month rise in the index of services in October, also released today, suggests that it is still slowing,” writes Samuel Tombs, chief UK economist at Pantheon Macroeconomics.
The downward revision to economic expansion reflected weaker growth in the UK’s dominant service sector – which is perhaps a concerning sign for the sustainability of the recovery – Miller adds. Moreover, the economic expansion in the third quarter of the year “was still driven by domestic demand, with net trade still estimated to have subtracted a hefty 1.0pp [one percentage point] from GDP growth,” says Miller.
“On the basis of today’s data, growth of 2.2% [in 2015] now looks much more likely, down from our previous expectation of 2.4%,” Miller writes. Nonetheless, the economy will end the year on a stronger footing, with growth set to pick up to around 0.6% or so in the final three months of the year, she adds.
Meanwhile, a separate release showed that the UK current account deficit was stable in the third three months of the year, at ÂŁ17.5 billion or 3.7% of GDP. Also, UK labour productivity improved further in third quarter, more data showed.
“The UK current account deficit was unexpectedly stable in the third quarter at the lowest level since the third quarter of 2013 as a reduced shortfall in investment income countered a renewed widening in the total trade deficit,” writes Howard Archer, chief UK and European economist at IHS Global Insight.
However, “while the markets have so far taken a relatively relaxed view of the UK’s elevated current account deficit, it could become an increasing problem if the markets lose confidence in the UK economy for any reason,” he adds.
As for sterling, “the pound has been resilient in the face of this unexpected economic cooling but with the Bank of England in no rush to move on monetary policy changes and clearly signalling that the next intervention will be to hike, we may see the $1.48 level hold as firm support all else being equal,” writes Brenda Kelly, head analyst at London Capital Group.
Sterling was trading at $1.4892 at 1225 GMT, up around 0.5%. The euro was down 0.7% at 73.35 pence.
Elsewhere, French economic growth in the third quarter of the year was 0.3%, according to a final reading published on Wednesday, in line with a previous estimate. However, French consumer spending fell the most in nearly two years in November as unseasonably warm weather held back energy and clothing purchases, official data showed.
