UK investors expecting to receive news of an official end to the recession on Friday were left bitterly disappointed. In a preliminary report, the office of National Statistics said GDP contracted for the sixth consecutive quarter, falling 0.4% from the prior period and 5.2% from a year ago. Economists who had been expecting quarterly growth of 0.1% have now revised their forecasts for a return to growth to the fourth quarter.
The news makes the UK the laggard of Europe, as peers Germany and France have already reported returns to growth after prolonged downturns. Even Japan, one of the economies hit the hardest by the global downturn, has seen growth return. Good news was hard to find in the reports, as all parts of the British economy showed major signs of weakness. Production from the services sector, a major driver of the UK economy, declined 0.2%, weighed down by poor results from hotels and restaurants.
The disappointing news is potentially a devastating blow for prime minister Gordon Brown, who had promoted his Labour government as the right group to bring an end to the recession and revitalize the economy. His party trails the rival Conservative Party by more than 15 percentage points in some polls. The Conservative Party took Friday’s disappointment as an opportunity to attack Brown’s leadership. “This news has destroyed Labour’s claim that Britain was better placed than other countries to weather the storms,” said George Osborne, the Conservatives’ finance spokesman.
UK ETFs On The Move
Britain is the world’s sixth largest economy and third largest in Europe, meaning that the shortfall will have an adverse impact on both regional European ETFs and more broad-based global funds. Two ETFs in particular were weighed down by the lackluster GDP report:
- iShares MSCI United Kingdom Index Fund (EWU): This ETF invests in more than 100 of the largest UK companies, with heavy tilts towards the financials sector (through HSBC, Barclays, and other big British banks) and energy (through BP and Royal Dutch Shell). EWU had been up more than 30% on the year, but was down about 0.5% in early trading Friday. Because most of EWU’s largest holdings are global companies that generate significant portions of revenue and earnings outside the UK, this ETF was somewhat insulated from the GDP shortfall.
- Rydex CurrencyShares British Pound Sterling Trust (FXB): The British currency was pounded in trading Friday, as the likelihood of rate increases in the foreseeable future decreased dramatically. The GDP shock sent investors flocking to UK government bonds, and gave many foreign investors jitters about the stability of the economy. FXB, which invests in the British pound, was down about 1.7% in early trading Friday, but still remains up more than 10% on the year.
Disclosure: No positions at time of writing.