So the UK's growth is now confirmed as sluggish for the second quarter. No one was expecting a stellar figure and the data came in-line with expectations at 0.2%. However, the markets hadn't been expecting some rather upbeat news from the Office for National Statistics that said if it wasn't for special factors like the Royal Wedding and the exceptionally late Easter holidays then growth may have been 0.7 per cent over the last three months. Its analysis suggests that the "special factors" could have depressed the services sector by 0.4% and the production sector by 0.1%.

The market was positioned for a weak number, so this flicker of hope that the UK isn't about to fall back into recession helped boost sentiment to sterling.

However, we may be able to avoid a recession, but the details of the report were mixed. Service sector output rose by 0.5%, this was boosted by finance and business services and also government spending on services which rose by 0.8% on the quarter up from flat in the first quarter. Government spending is still rising, so if the government wants to reach their fiscal targets they will have to stop, which could adversely impact growth.

Total production decreased by 1.4%, led by mining and quarrying, which would have been adversely effected by the extra holidays in April. Worryingly, for the UK's efforts at re-balancing, manufacturing output is now thought to be 9% lower than it was before the 2008 recession, after falling 14.5% during the economic contraction.

Export volumes were also lower in Q2 compared with the prior three months. So the weak pound continues to evade boosting exports.

The UK's economy remains on shaky foundations, retail sales volumes rose by 0.2% in the second quarter and were essentially flat over the last 12 months. This is partly explained by rising food prices. Food sales, which contribute to more than 40% of total retail sales, are 4.2% lower than a year ago, which is the biggest fall since the series began in 1998.

Although non-store sales (internet dales) are up by 25%, this isn't enough to off-set weakness in food sales since they make up only 5% of total volume.

Overall this is a mediocre reading of GDP, but not as weak as some expected. The detail in the report provided the most interesting reading and showed just how much carnage the global recession did to the UK economy. There is no clear sterling trade from this data, and we continue to expect the pound to be impacted more by what the euro and dollar are doing.

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Best Regards,

Kathleen Brooks| Research Director UK EMEA | FOREX.com

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