Economics Weekly - UK data will keep focus on recession risk
Economics Weekly 27 October 2008
UK data will keep focus
on recession risk
The preliminary estimate
last week showed that the UK economy contracted by
0.5% in Q3 compared with the previous quarter. This represents the first
contraction in output since Q2 1992 and the biggest quarterly fall since Q4
1990. The market consensus view was for a smaller decline of 0.2%. Looking ahead,
a further modest fall in Q4 is possible, though so is flat growth. Should the
Q4 outcome be negative (published in January), then the UK economy will be in
technical recession. Given the latest figures, our weaker case scenario for
growth (as published earlier in the year), where the UK economy contracts by up
to 1% in 2009, now seems more likely. What does this mean for UK base rates? We
forecast a base rate cut of one percentage point to 3.5% - probably a 0.5% cut
at the BoE's 6th November meeting and an additional 0.5% cut - which may take
the form of another round of co-ordinated central bank cuts- before year end.
Confirmation of a contraction in Q3 US GDP may provide
further justification for the Fed to cut its funding rate by up to 0.5% to 1%
at this week's meeting. Moreover, should the German IFO survey and EC
confidence indices for October weaken further and the flash CPI October
inflation figure fall to around 3.4% as expected, the chance of up to a 0.5% cut
in rates to 3.25% by the ECB will significantly increase. The Norwegian central
bank is expected to cut interest rates by 0.5% to 4.75% on Wednesday.
â€¢ UK data will keep the
focus on recession as housing market-related figures and consumer confidence and
retail sales surveys stay weak. The consensus forecast is for mortgage
approvals to stay around last month's record low level of 32,000 in September.
Net mortgage advances could rise to Â£1bn in September from a very weak figure
of Â£143m in August, but still sharply lower than last year's levels. GfK
consumer confidence for October may ease from September's low level of -32,
which should be reflected in a drop in the CBI distributive trades' survey from
-27 in September to possibly -35 this month, as high street businesses perceive
households as either reluctant and/or unable to increase spending.
â€¢ US economic data due this
week are likely to provide justification for another Fed interest rate cut. The
extent of the deterioration in the figures, and equity market turmoil, will
dictate whether the Fed goes for a 0.25% or a 0.5% reduction. Practically all
data releases are expected to show a worsening economic backdrop. Starting with
weaker new home sales and consumer confidence figures before the Fed's decision,
then the Q3 GDP first estimate on Thursday after the meeting (although the Fed
will almost certainly have seen the number in advance). The market consensus
forecast is for a contraction of 0.5% on an annualised basis, compared with 2.8%
growth in Q2 when $180bn of tax rebates in that quarter may have helped prop up
consumer spending. Friday's official data releases may show a modest increase
in personal spending in September, while growth in the core PCE deflator, the
Fed's preferred measure of inflation, may slow to 0.1% on the month,
representing 2.5% on the year, which would mark the first drop in the annual
rate since last February.
â€¢ In the run up to the
ECB interest rate meeting on the 6th November, speeches by President Trichet
and other ECB members will be scrutinised for hints of the likelihood and
magnitude of additional interest rate cuts. This week, we expect the key German
IFO survey to weaken and consumer & industrial survey confidence levels to
fall. Should weak data be accompanied by a decline in CPI inflation last month
from 3.6% in September to 3.4% in October as expected, the likelihood of an ECB
rate cut will be increased.
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