Posted by Louisa Heath on October 24th, 2016.
Gross Domestic Product (or GDP) is one of the more commonly known economic measures, but even if you recognise the term you may still find yourself wondering just what it actually means. In its simplest terms, GDP refers to the monetary value of all the finished goods and services produced within a country. This gauges the level of economic activity within the nation, offering an important snapshot of the economy in question over either an annual or quarterly period.
As a result, investors are particularly interested to see the UK’s third quarter GDP report, which will be the most comprehensive assessment of the post-referendum economy to date. How well the economy has been able to weather the initial shock of the Brexit vote and the uncertainty that has followed is likely to have a marked impact on the appeal of the Pound.
Although initial forecasts had pointed towards a prompt recession in the event of a Brexit vote, economists have largely revised up their expectations in response to the various pieces of positive data that have been released in the intervening months. Current market consensus is for growth to have slowed from 0.7% to 0.3% on the quarter, a weakening which would not be entirely encouraging but which would put recession fears to bed, for the time being at least.
The major repercussions of the data will be on the outlook of the Bank of England (BoE), which had indicated a willingness to cut interest rates again in the near future if there are signs that the economy needs further stimulation. As a result, the outcome of the GDP report is likely to see the odds of imminent action from the BoE being repriced, something which could weigh heavily on the Pound.
Should the third quarter GDP report show a greater loss of momentum then the Pound is expected to see further losses across the board. This would signal a reversal in fortune for the UK economy, suggesting that Brexit-based uncertainty is likely to weigh on the nation’s outlook for the foreseeable future. This could also exacerbate concerns surrounding the government’s harder line of Brexit rhetoric, with any loss of access to the single market expected to dent activity further by limiting trade flows with the UK’s largest trade partner.
On the other hand, Pound exchange rates could be boosted if growth proves to have been stronger than expected in the third quarter. This would help to ease investor worries over the resilience of the UK economy, painting a more optimistic picture of the outlook for businesses and consumers alike. Even so, it should be noted that Sterling has displayed more muted reactions to positive data in recent weeks, with the impact of the GDP report more likely to be felt if it proves a disappointment.
Alongside domestic inflation data, which impacts more directly on interest rates, this will remain one of the key data releases for the Pound in the months ahead. Any sustained softness in GDP would suggest that the UK may face greater hardship as it separates from the EU, a prospect that could see Pound exchange rates falling towards fresh lows against rivals.
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