UK growth meets expectations; Italian concerns rise

The second and final read on second quarter growth has confirmed that the UK economy continues to chug along ok, with a solid but not spectacular rise in GDP of 0.4%. The pound has had a slightly negative week on the whole, but the losses have been well contained and there’s not been a big continuation of last Friday’s declines. The FTSE is on track for a 3rd consecutive week of gains with the market firming up back above the 7500 level.

 

Service sector drives growth  

The latest figures on growth have reaffirmed the decent recovery seen in the 2nd quarter, as the economy bounced back from a weather affected Q1. The service sector was the largest contributor to the gains, gaining by 0.6% due in part to a rebound in retail sales. Household spending also improved and the growth rate of 0.4% is back in line with those seen in the final 2 quarters of last year. The pace of growth has been around these levels for the past 18 months and equates to annualised figures in the region of 1.5%. This keeps the UK towards the bottom end of a developed economies leaderboard and with the US posting growth in excess of 4% for the same period it is clear that we are still far from firing on all cylinders. In terms of market impact this figure isn’t too important as it comes with a significant lag but there has been a small uptick in the pound which has moved off its lowest level in over a fortnight against the US dollar just above the $1.30 level.     

 

Italy announces higher budget deficit

There’s been a sizable drop in Italian assets this morning with government bonds and the stock market both falling after the country announced a planned budget deficit of 2.4% for next year. This is towards the higher end of estimates and was celebrated by leaders in the coalition government, although it is above the preference of finance minister Giovanni Tria and also sets the country on a possible collision course with the EU over the bloc’s fiscal rules. Mr. tria was believed to have been pushing for a 1.6% deficit and the much larger one that has been agreed pon does threaten to undermine his influence on the country’s finances with spending plans now 3 times the initial projections for 2019. The moves seem to be fairly contained to Italy at present although we have seen a little softness in the Euro over the past 24 hours, not helped by the  core inflation number for September unexpectedly declining to its lowest level in 6 months.