UK Economy Stays In Recession – According To OECD And Morgan Stanley

(UK) The OECD now expects the UK economy to shrink this year compared to its prior view where it had expected a growth rate of 0.5%. The OECD economist said: Most of it is really about the external environment the euro zone crisis is going to weigh on the UK in the coming months. Under these circumstances you cannot expect much more than very slow growth. GDP will probably fall in 2012.

(UK) Morgan Stanley also lowered its economic expectations for the UK. Its 2012 GDP forecast was lowered from +0.5% to -0.5%; 2013 lowered from 1.8% to 1.0%.

(UK) Jul 31 – Moody’s reiterates UK sovereign outlook at negative:

• Challenges include weak economy and reduced fiscal flexibility
• Other risks stem from the EMU crisis
• Could downgrade the UK sovereign rating if debt outlook worsens over the next 3-4 years
• Forecasts UK 2012 GDP growth at +0.4%; 2013 growth at +1.8%

Note: On Feb 13th 2012 Moodys cut UK sovereign outlook to negative and reaffirmed AAA sovereign rating

(UK) JULY PMI MANUFACTURING: 45.4 V 48.4E- Output Index: 43.3 v 51.9 prior, lowest since March 2009

How to interpret these headlines?

After today’s shockingly disappointing PMI release, most analysts have downgraded their forecasts on UK’s economy.  Analysts are calling a contraction of 0.5% for 2012 and a modest growth of only 1.0% for 2013, and that’s the optimistic estimate, without considering the implications of a potential Greek Exit, Spanish Bailout, and Italian Aid.

With all of the hopes of recovery resting on the Olympics, which could bring its GDP up by 1.0 ~ 1.5%, may not be enough to bring growth back, especially considering recent contraction in global economy, including that of China, Australia, and even in the United States.  I would definitely be looking to go LONG on EURGBP as the pair has the potential of moving beyond the 0.8100 level due to ECB Intervention this week (either by restarting the SMP program or third round of LTRO), as any action by the ECB could change the medium term trend for the Euro, thus consolidation of the EURGBP pair could pick up momentum as the fundamental outlook catches up with the Sterling.

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