The most likely outcome is that the UK will avoid a triple-dip recession on Thursday. Given the media hype surrounding the release, any figure above zero will trigger a potential Sterling surge on short covering. The underlying economic backdrop will, however, remain precarious regardless of the GDP data. To help stabilize growth and debt dynamics, the UK currency will have to decline sharply over the medium term. In this environment, any Sterling rallies on the data should be seen as a clear selling opportunity, especially on any approach to 1.54 against the dollar.
The UK and global media have prepared lurid headlines that the UK economy is in a triple-dip recession which will be unleashed instantly if the National Statistics office reports a first-quarter GDP figure below zero. There is little doubt the Sterling will be in for an initial caning if a GDP contraction is confirmed with positioning into the data leading to a sharp recovery if worst fears are not realized.
In the big picture the difference between a figure of 0.1% or -0.1% is close to meaningless, especially as the data will be revised, possibly sharply during the next few months. In this context, the market impact vastly overstates its actual importance.
The more likely outcome is that there will be marginal GDP expansion for the quarter. A positive figure should certainly not be considered as giving the all-clear for the economy. It may provide some immediate relief, but will still bring the severe underlying situation into focus. Political pressure on the government will remain intense, especially with the likelihood of a less than glowing report from the IMF in its May annual review.
The latest Markit data continued to register a squeeze on UK household finances for April with the first monthly deterioration for 2013. The latest earnings data last week also recorded minimal earnings growth with a decline in real terms and this will inevitably hurt spending. The government resorted to primitive accounting tricks to prevent the underlying 2012/2013 fiscal deficit rising over the year. The underlying growth and budget dynamics remain horrendous with he decline in oil prices providing only limited relief.
The Bank of England will remain under very strong pressure to provide additional stimulus and an implicit inflationary push through a weaker exchange rate with the artificial propping-up of house pries crucial to avoiding an implosion of consumer confidence.