Divyang Shah, Senior IFR Strategist
At first blush, the Q1 GDP figures from the UK this morning contained very little in terms of new information with a q/q reading of +0.3%. This should not be of surprise as it was the third reading, but what was more important were the revisions that show an economy that suffered a sharper downturn in 2008, wiped out the doubled-dip recession and a wider output gap.
The ONS now estimates that the UK economy fell a staggering 7.2% in the economic downturn of 2008/2009 compared to a previous estimate of 6.3%. This also explains why the recovery has also been revised lower and the economy is now some 3.9% lower in Q1 2013 compared to the peak in Q1 GDP sharply up from a previous estimate of 2.6%.
We have also erased the double-dip of 2011/2012, with growth now estimated to have been flat during this period compared to a fall of 0.1% previously.
Usually the data on GDP, especially the final release, do not have much in the way of implications for monetary policy, but the wider output gap and much flatter growth profile suggest that there is little here for the BoE to be rushing into removing existing accommodative policy.
This is especially as fiscal policy continues to be tightened and thus looser monetary policy required as a counterweight.
We continue to believe that the recent market pricing on the BoE rate outlook was overdone and looked to:
1) receive 1y1y GBP at 1.10% compared to 0.98% currently, as well as
2) a narrowing in the Dec4/Dec5 spread from 57 ticks currently 54 ticks.
