Leading shares have come off their best levels but remain in positive territory following UK GDP figures which showed last year's recession was deeper than expected.
The UK economy grew by 0.3% in the first three month of the year, the same as previously forecast. But it contracted by 6.4% between the second quarter of 2008 and the third quarter of 2009, rather than the 6.2% initially indicated. There had been hopes there would be a positive revision showing a shallower recession. The FTSE 100 is now up 5.85 points at 5138.79 but the pound fell by 30 ticks against the dollar to a one and a half week low of $1.4949 and the September gilt future has recovered from early losses to sit at an unchanged 121.29. James Knightley at ING Bank said:
The delayed revisions to first quarter 2010 GDP show no major changes at the headline level with GDP growing 0.3% quarter on quarter and -0.2% year on year. However, there have been some historical amendments, which mean that the peak to trough fall in output during the recession is now quoted as 6.4% versus 6.2% previously thought.
There are some worrying developments though with exports revised down to -1.7% from 0.0%. This is the worst performance since the first quarter of 2009 and again highlights the fact that sterling's depreciation has failed to boost UK economic activity. We also saw a 1.5% jump in government consumption (previously reported as 0.5%) so with fiscal austerity being stepped up and consumer spending growth still falling there is significant reason for concern over the UK's growth prospects.
With fiscal austerity set to intensify over the next few years as the government tries to get a grip on the UK's budget deficit the savings rate may have to push close to zero if the economy is to avoid slipping back into recession. Even then, this will likely generate real consumer spending growth only in the 1-2% range for the next few years. This should further help to ensure loose monetary policy continues for the foreseeable future. We forecast the first bank of England rate hike for the third quarter of 2011.
