Q4 GDP Data Indicates Hard Times Ahead for Pound

The release of the Q4 GDP data has cemented the feeling in certain quarters of the market that the U.K.’s economy is not likely to strengthen anytime soon.

Optimistic analysts were doomed to disappointment with the quarterly contraction of 0.2% indicated by the statistics.

There are still opposing viewpoints about whether the country is all set for a recession but the recent happenings in the Eurozone do not seem heartening in the least. Meanwhile, analysts are also cautioning against a possible dip in pound value, a point that forex traders should bear in mind.

Immediate Impact on Pound

While the pound remained largely unchanged against counterparts immediately following the release of the GDP, there is little doubt that it will be affected. Unemployment is at its highest in 17 years in the U.K. and this brings little cheer to the overall picture. Forex traders should bear in mind that the pound may remain fickle for a little while now. It may be a cautious move to estimate its movements for the near future by reading up on what the experts have been saying. 

E&Y ITEM Club Prediction 

The GDP contraction was not wholly unexpected. About a week ago Ernst and Young ITEM Club brought out a report that was of great interest and importance especially to Forex traders. In this report, the forecasting group clearly stated that the U.K.’s economy was being badly impacted by the uncertainty on the European front. E&Y also believed that the country’s economy is already in recession.

The GDP figures only serve to drive home the fact that E&Y’s predictions seem to be right on the mark. If the reasons offered by the E&Y for this recessive trend are accurate, then the economy may only recover when the entire Eurozone stabilizes. After all, according to E&Y commercial managing partner, Martin Cook, several U.K. businesses depend heavily on trading partners across Europe. Moving to new pastures may be the only option left to such business if they wish to unshackle themselves from business partners in beleaguered nations.

The dependence on other economies has it own impact on the fortunes of the pound. Traders need to tread carefully when comparing the pound against currencies of nations on whom the U.K. is dependant.

Are We Already in Recession?

While it is still difficult to say if the U.K. economy has slid into a recession, there are experts who subscribe to this viewpoint. In the words of Professor Spencer, who is the chief economic advisor to E&Y ITEM Club, the 2011 last quarter data and the 2012 data so far indicate that the recession is upon us already. The Centre for Economics and Business Research (CEBR) agrees with the E&Y’s take on the situation.

The Silver Lining

The situation is not likely to get as bad as 2009’s economic fiasco, experts add. A serious double dip is not likely to be in the offing. Although exports have slowed down and business investment will soon be significantly subdued, U.K companies with healthy balance sheets will ride out the recession and emerge fairly unscathed, according to the ITEM club report. The situation will also result in a rather pleasant fall-out for consumer who may enjoy lower prices overall. For the Forex trader, while a spectacular revival in the pound may be too much to expect, he can probably assume that the currency will not actually scrape the bottom.