EUR/GBP: Pound to Dip as British Economy Seen to Have Contracted in Q4

Estimates that the British economy shrank in the fourth quarter of 2012 are seen to weigh considerably on the British pound today on views that the country could be headed for an unprecedented triple-dip recession this year. Likewise, analysts say that British Prime Minister David Cameron’s pledge to hold a referendum on Britain leaving the European Union by the end of 2017 may damage business investment and jeopardize further an already frail recovery.

Economists estimate that the UK Office for National Statistics will report that the UK economy declined by 0.1 percent in the fourth quarter of 2012 as the boost from the 2012 Olympic Games during the summer faded. The British economy resumed growth in the third quarter though the recovery remains under pressure from deep government spending cuts and weak wages that could not keep up with inflation. The economy’s performance during the quarter was also affected by maintenance shutdowns in oil and gas platforms in the North Sea, which has likely caused industrial output to post a substantial fall in the period between September and November. Consumer spending during the holidays was also depicted as lackluster by numerous retail chains.

One-off factors, such as this month’s snow and freezing temperatures, which put transportation to a halt and consumers to put off plans to visit stores, could very well tip shrink the economy this quarter to confirm a recession. That would put the UK economy in its third slump since GDP reached its peak at the start of 2008, effectively a triple-dip recession. Meanwhile, analysts deem that British PM Cameron’s plan for a referendum on the UK’s EU membership would further dent prospects for the economy. At the World Economic Forum yesterday, Cameron defended his plan, saying it would not undermine the country’s appeal for global investors. Adam Posen, a former Bank of England policymaker, said that the prospect of a referendum will have a chilling effect on investment in the UK. Such uncertainty extended until 2017 will likely augur negative effects on the already difficult business climate.

As for the Euro Zone, data from Germany today is seen to suggest that the European powerhouse is will likely lead the bloc towards recovery this year. The German Ifo Business Climate is estimated to reach its highest level in six months in January, suggesting improved business confidence in the country. Amid these contrasting views for the British and Euro Zone economies, a long position is recommended for the EUR/GBP trades today.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.