U.K. Q1 GDP was revised down more sharply than expected to -2.4% q/q and -4.9% y/y from -1.9% q/q and -4.1% y/y, and against a consensus forecast for a downward revision to -2.2% q/q and -4.4% y/y, after very weak Q1 construction data. However, Q1 is likely to have represented the trough of the recession and we look for stagnant growth in Q2. Household spending growth was revised down to -1.3% q/q from -1.2% and investment growth was revised down sharply to -7.5% q/q from -3.8% in the second Q1 GDP release. Government spending growth was revised down to 0.2% from 0.3% and export growth was revised down to -3.4% q/q from -2.8% previously. On the output side, service sector growth was revised down to -1.6% q/q, from -1.2% earlier and total industrial production was revised to -5.1% q/q from -5.3%. Meanwhile, Q1 current account deficit, also released today, tightened to GBP8.54 bln from 8.77 bln, after the Q4 reading was revised from a 7.64 bln deficit. The downward revision of Q1 growth to -2.4% q/q and -4.9% y/y from -1.9% q/q and -4.1% y/y, means that the headline q/q decline was the largest since Q2 of 1958. The annual decline was the largest since comparable records began in 1948. The ONS noted that the extremely large revisions were due to changes in calculation methodology for construction data and services.
Euro-Zone June HICP inflation decelerated to -0.1% y/y from 0.0% y/y in the previous month. This was in line with our forecast and a tad below our median of -0.2% y/y, which already looks too high, after weaker than expected German and Spanish inflation data. There was no breakdown but the deceleration is likely to be once again due to positive base effects, while the most relevant upturn in heating oil and petrol prices should have prevented an even sharper drop. Base effects will turn negative again toward the end of the year and with confidence stabilizing we agree with the ECB that deflation risks are limited for now, even though the ECB needs to watch inflation expectations carefully.
Meanwhile, Middle Eastern bids are noted in EUR and GBP, with EUR/USD running in to demand from 1.4080 to send the pair back above 1.4100, while Cable was supported ahead of 1.6600 by the same name to fuel a small move back in to the 1.6630 region. Equity markets have not provided much impetus so far, with Europe largely flat on the session, while U.S. equity market futures are a touch high so far, which should limit any dollar and yen buying interest.
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