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British pound slides as UK Q3 GDP data shows growth slowing

European indices are tumbling on Thursday as optimism over Pfizer’s COVID-19 vaccine, which had also triggered bullish momentum in pound Sterling (GBP) across the first half of the week, is fading.

Investors are refocusing their attention to rising global coronavirus cases, and recent UK gross domestic product (GDP) data for Q3 is intensifying downside pressure on the British pound (GBP).

The downbeat mood has renewed demand for the US dollar (USD), and as a result, the British pound to US dollar (GBP/USD) exchange rate has slumped from multi-week highs of  USD 1.331 to USD 1.3147 as of 13:00 GMT.

The British pound to euro (GBP/EUR) exchange rate suffered a massive blow in the wake of UK Q3 GDP data, with the currency pair are currently trading 0.7% lower at EUR 1.1141.

According to the Office for National Statistics (ONS), UK GDP rebounded by a record 15.5% in Q3, with all elements of the economy – services, manufacturing, construction, government spending and exports increasing.

However, while the latest figures have indicated that the country has bounced back from a recession, the economy is still 9.6% smaller than it was at the start of 2020.

Unlock UK Economy

UK economy expands at a record pace, but concerns remain

According to the latest economic data released by the ONS on UK GDP, Britain sharply reversed Q2’s decline of 19.8% in the three months leading up to October.

But while the UK economy has moved out of recession, the expansion was not enough to completely reverse the coronavirus-induced damage. The economic performance was also unimpressive compared to the 33% gain recorded by the United States and slightly lower than preliminary estimates, as a panel surveyed by Reuters had expected an increase of 15.8%.

The challenge the economy now faces is whether it can continue expanding in the fourth quarter, given that COVID-19 cases are spiralling across Europe and a second national lockdown in the UK has stunted social activity.

Health officials confirmed that there have now been more than 50,000 COVID-19 fatalities in the UK. With a vaccine unlikely to be widely available until December at the earliest, Britain is positioned for a challenging winter.

So while today’s data will be a welcome partial reverse from the unprecedented slump seen during the three months from April to June,  the engines for growth appears to be revved up, sadly, the figure is also a rear-view mirror on the economy.

The growth registered in the third quarter reflects a period of declining coronavirus cases, Chancellor Rishi Sunak’s Eat Out to Help Out scheme and higher government coverage on the furlough scheme.

In Q4, more restrictive measures have been introduced across the UK’s devolved nations, while England has entered a full-scale lockdown. The Bank of England (BoE) and the Treasury have also increased fiscal stimulus to support the economy and prevent widespread unemployment.

However, recent economic data revealed that the UK unemployment rate has touched a record 4.8% in 2020 and with England’s second lockdown not due to finish until December 2nd, joblessness will continue to surge as employers fall victim to financial strain.

While talks of a vaccine being available by year-end looks like the light at the end of the tunnel, analysts warn that the UK economy could suffer another contraction in Q4 due to the impact of the renewed coronavirus restrictions across the country.

UK Coronavirus lockdown

New lockdown restrictions to mar UK economic recovery

The UK economy’s tepid recovery is being forecast to reverse in the three months between October and December due to current lockdown restrictions imposed across the nation, which will likely weigh on GBP/EUR and GBP/USD exchange rates.

Growth already appears to be running out of steam given that September recorded an expansion of just 1.1%, which was before draconian restrictions and the second lockdown was announced.

Pantheon Macroeconomics Chief UK Economist, Samuel Tombs, forecasts the UK economy to contract by 0.5% in Q4, stating that the second lockdown will have “prompted 6% month-to-month decline in November and a 5% rebound in December”.

He suspects that the UK won’t make a full recovery until next spring as the UK government will likely choose to reintroduce looser restrictions following the lockdown, such as the tiered system imposed in October.

That being said, with a potentially successful vaccine on the cusp of being approved and the UK expected to be one of the first to receive millions of doses, the outlook for the economy could be much rosier than anticipated.

However, this will also depend on the outcome of Brexit trade talks between the UK and the EU, as a no-deal Brexit is expected to have a devastating impact on the British economy as it would increase tariffs and quotas on exports to the bloc.

With UK GDP data out the way, Sterling traders will be eyeing Bank of England (BoE) Governor Andrew Bailey’s speech scheduled for 16:45 today and Brexit developments, which if positive could offer GBP some respite.

Meanwhile, US inflation data, US Initial Jobless Claims figures and European Central Bank (ECB) President Christine Lagarde’s speech will be monitored in the North American trading session.

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