UK GDP Preview: Expectations look too low and Sterling may surge

How hard has Brexit uncertainty hit the UK economy? That is the question on investors' minds. Economists believe that it has had a substantial adverse impact on growth, and that explains low expectations. 

The FXStreet economic calendar shows forecasts standing at 0.2% QoQ and 1.4% YoY in Q1 2019, identical to the outcome in Q4 2018 and weak numbers in absolute terms. 

During Q1 2019, the British parliament voted down May's Brexit deal three times and also rejected other alternatives. The raging public debate took over the news and the March 29th deadline was looming over businesses and households alike. The gloom was reflected in surveys. The purchasing managers' indicators for March were already mostly contracting, indicating the economy had all but ground to a halt. 

PMIs are surveys asking businesses about the current situation and future economic prospects. However, this data, called "soft" does not reflect what has actually happened in the economy. And the data that does look at the hard evidence is painting a different picture. 

Retail sales rose by 1.1% in March, on top of 0.6% in February and 0.9% in January. UK shoppers played their role in boosting the economy as consumption was stimulated by falling unemployment which hit a historical low of 3.9% as well as rising wages, that accelerated to an annual growth rate of 3.5% YoY in March.

And what about production? The industrial sector was doing quite well, increasing output which rose by 0.9% in January and 1.1% in February.

GBP/USD has room to rise?

All in all, the gloomy mood is not reflected in the data we have so far. So, a growth rate of 0.3% or 0.4% QoQ cannot be ruled out. Moreover, the euro-zone reported an expansion of 0.4% last quarter, double the 0.2% level both the currency bloc and the UK saw in Q4. Brexit has not happened yet, and the economies are tied together. 

If GDP growth comes out above expectations, GBP/USD has room to rise. Cable has already paid the price for the impasse in both cross-party Brexit talks and trade negotiations between the US and China and may just need a spark to bounce back to previous levels.

In the less likely case that growth slows down to 0.1% QoQ or goes flat, GBP/USD may continue struggling, with gloomy headlines continuing to push the pound lower for longer. However, it seems that an upside surprise is more likely than a downside one.

The UK quarterly GDP data is published on Friday, May 10th, at 8:30 GMT alongside its main components: manufacturing production, construction output, and others.