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Earlier this morning, the UK reported that its economy contracted for the third month in a row at a rate faster than what most economists were expecting.Experts pointed to weather and a national holiday as sources of weakness.
But Waverly Advisors’ Andrew Barber reminds us there was a third big factor at play: austerity.
The British economy will continue to serve as an example of what happens in an economy when the government tightens its belt.
Barber hopes politicians will keep this in mind when they decide to push or pull policy.
Here’s Barber’s commentary on the British pound from this morning:
“The EUR/GBP has probed levels not seen since 2008 recently. While our attention has been focused on the theme of USD strength, this relative set-up is of interest.
UK Q2 GDP registered a sequential contraction of 0.7% Q/Q (-0.8% Y/Y) versus consensus forecasts of 0.2% Q/Q. While weather and the Queen’s jubilee undoubtedly had an impact not adjusted into the headline figures, with production declining by 1.3% Q/Q and services by 0.1%, the malaise is undeniable. With the cost of austerity measures fully reflected in these activity levels, a key political test for the Cameron administration is shaping up as critics argue for more stimulus.
Despite a one-day reversal for EUR/GBP on this bad news, news we anticipate that the longer-term trend will remain intact as the UK’s profound economic dilemma (the “known”) versus the EU’s dysfunction and denial (the “unknown”) remains more palatable to both investors and the risk adverse on a relative basis. Elected officials and policy leaders in the UK have a clear mandate in place currently, and room to manoeuvre should they change course. Their EU counterparts must first understand where they are and where they wish to be before they can even begin to chart a course.
We will keep this pair firmly on our radar screen for now. “