What could the Q1 GDP figures mean for my business?

By Guest Contributor
April 26, 2011

By Jamie Jemmeson

-Jamie Jemmeson is a Trader at Global Reach Partners, the foreign exchange company. The opinions expressed are his own.-

The alarm bells have been ringing in the UK since the surprise contraction in Q4 GDP 2010.  The Bank of England (BoE) remains in limbo between the ECB, who recently hiked despite their problems with sovereign debt and the US, where quantitative easing remains in force until at least June. The release of the preliminary Q1 GDP on the 27 April could be instrumental in determining not just how the currency and financial markets perform, but in directing measures the BoE and coalition government may have to take. Since the surprise contraction in GDP, the BoE has been forced to sit on its hands and watch inflation continue to increase while reiterating its belief that this is just a temporary phase. There is a real dilemma in the UK that has split the market; will the UK face the daunting reality of a double dip recession?

Data that has recently been released has done little to reassure the markets; the British Retail Consortium reported that retail sales for the month of March tumbled at their fastest pace in 6 years as spending cuts, tax rises and high unemployment took their toll on consumer confidence. As a result, Sterling is very vulnerable to the outcome of the UK GDP figure later this month. This means businesses that import and export are exposed to a great deal of risk when protecting their budgeted rates in foreign exchange for the year.

If the UK does enter a double dip recession on the 27 April, the value of Sterling is likely to fall. Consumer confidence is already near record lows and will plummet further if we see the inevitable media frenzy that would accompany the news of a double dip. The result could be a decline in retail sales and higher unemployment, two factors that will not be greeted with open arms by UK businesses. The BoE’s task of tackling inflation will become a steeper uphill slog as the justification of an interest rate hike would become difficult. Various rating agencies have already warned that weaker growth could jeopardise the UK’s prized triple AAA rating, a downgrade can only have negative effects. Finally, let’s not rule out the possibility of further quantitative easing down track that would naturally weaken the Pound.  All of this uncertainty would weaken Sterling, and hurt businesses that import goods and raw materials as a result. However, companies that are manufacturing goods for the export market may embrace the weakness in the currency as the demand for British made goods become more appealing.

If the UK dodges the silver bullet and avoids the double dip recession, hope and confidence may start to be restored. The net effect should result in a stronger currency and strengthen the coalition government’s position. The main price driver this year has been interest rate expectations. A return to growth would give the BoE more scope to start tackling the mounting inflationary pressures by increasing interest rates. In this benign scenario it is more than likely that the nation’s AAA credit rating will be preserved thereby enticing business and foreign direct investment while allowing the Coalition Government to continue to plough on with their austerity plans to improve the nation’s finances.

The net effect will be positive for Sterling. The rising pound would assist in tackling some of the imported inflation. For those who are importing this would be a timely boost and a noticeable help in pushing prices lower. Conversely businesses that are manufacturing goods for export would see their products become less competitive in price terms.

The question that business owners need to ask themselves is, can they afford to take the gamble on Q1 GDP? With so much riding on the outcome of this figure, budget levels should be scrutinised to assess the potential impact a sharp move in the currency may have on their bottom line. Despite all the celebrations surrounding the Royal Wedding the Q1 GDP should not get lost under the piles of bunting.

Comments

Yes, well there’s all this talk about rebalancing the economy, but the weak pound has not really worked towards that end. It has not done much for exports, and a large section of the economy, businesses that import, has been put in jeopardy because sterling has been unfairly trashed on the foreign exchange markets. Its devaluation against the euro has been vastly overdone, mainly because dealers know that the Bank of England looks benignly on a weak pound and would like to prevent it rising against the single currency. However Q1 turns out, I and many others look forward to a more sensible £/euro positioning in the near future.

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