U.K. investment weakness to be driven by business investment in H2, trade balance to show some rebound - Barclays

Net exports in the U.K. continue to underwhelm as capacity and supply restraints cap production. Trade recorded a zero contribution in the second quarter as imports surprised to the upside and exports to the downside. Poor trade performance despite material competitiveness gains from the depreciation of currency are expected to remain and only rebound as Brexit uncertainty is resolved. Growth in the U.K. in the second quarter was the most subdued in the EU5 and was also lower than the EA as a whole, Japan and the U.S.

The quarterly numbers translate into 1.7 percent year-on-year growth following 2 percent in the first quarter and the lowest level since the second quarter last year, noted Barclays in a research report. Nominal GDP rose 3.6 percent year-on-year and GDP deflator rose 1.9 percent year-on-year down from 4.4 percent and 2.3 percent respectively.

According to Barclays, consumer expenditure growth is expected to come in at 0.1 percent to 0.2 percent quarter-on-quarter in 2017 and 2018. Significantly, a negative print is unlikely even though the trend since has increased the possibility of a consumption recession since the start of 2017. But sub 1 percent year-on-year growth in consumption property shows the nature of the current shock so far and that unless consumer sentiment drops off a cliff, resilience in the labor market should give support and help avoid negative growth in consumer spending, noted Barclays.

“Regarding the other components of GDP, we continue to forecast investment weakness in H2, driven by business investment, but some rebound next year; we maintain our very cautious stance regarding net exports even though we expect the trade balance to show some improvement over the forecast horizon”, added Barclays.

Meanwhile, government consumption is expected to be neutral this year; however, it is likely to be a drag again in 2018 unless the government radically changes its budget plans later in 2017.

At 20:00 GMT the FxWirePro's Hourly Strength Index of British Pound was neutral at -6.73085, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -71.7859. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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