The UK GDP Second Estimate Preview: Growth Set To Look Slightly Better Than At The First Glance

This article originally apeared on FXStreet.

• The UK first quarter GDP is expected to rise 0.1 percent Q/Q and 1.2 percent y/y after revision but may surprise on the upside.
• Decelerating inflation and the economic growth are both reasons for the Bank of England to ponder the rate hike later, maybe this autumn.

The first quarter preliminary reading of the UK GDP came out as a shocker for markets that expected the GDP to rise 0.4 percent Q/Q and 1.4 percent y/y while the economy rose 0.1 percent Q/Q and 1.2 percent y/y. The first quarter blip of the UK economic growth reflected adverse weather conditions and unusually early timing of Easter holidays that weighed on both consumer spending as well as on the number of actual days worked.

Although no changes are expected in the first quarter GDP revision that is scheduled for this Friday at 8:30 GMT, there are chances that the second reading taking into account also more detailed figures will bring the upward revision to the growth.

The first estimate of the GDP is calculated by adding taxes and subtracting subsidies to get the estimate of total gross value added. However, as there is no information available on taxes and subsidies at the time of the first estimate of GDP, the quarterly growth in gross value added is taken as a proxy for GDP growth itself. And that may vary with the second estimate that is using more in-depth information. 

Fundamentally, the decelerating inflation is good news for the UK consumers that were hammered by the prolonged period on negative real, inflation-adjusted wage growth. With inflation decelerating to 2.4 percent in April compared with 2.5 percent y/y expected by the market while core inflation rose 2.1 percent in April compared with 2.2 percent y/y expected. The UK inflation confirms the Bank of England dovish stance echoed by May Inflation Report.

The Bank of England also indicated that the first quarter UK GDP was just a weather-related blip while presenting the May Inflation Report. “GDP growth is projected to pick up after the weak first quarter to annual rates of around 1,8 percent throughout the forecast period,” the Bank of England Governor Mark Carney said in the opening remarks at the press conference after publishing May Inflation Report on May 10.

The signs of the economic revival in the UK are tangible, at least as far as concerning the UK UK retail sales report for April. After barely rising in March, total retail sales picked up strongly in April, rising 1.6 percent over the month while increasing 0.7 percent m/m after the auto motor fuel sales are excluded.

While talking to the world markets and the journalists assembled at the May Inflation Report press conference, the Bank of England Governor Carney also provided the reason for cautious optimism saying: “While the storms of February and March have given way to sunnier skies, the economic outlook for the UK remains clouded by Brexit uncertainties. Despite the welcome agreement on a transition period, the terms on which the UK will trade with the EU beyond that period remain to be determined.”