Economics Weekly - Will this UK recession be as bad as last time? Weekly economic data preview - BoE and ECB to cut interest rates by at least 50bp
Economics Weekly 3 November 2008
Will this UK recession be as bad
as last time?
UK economy contracts for
the first time since 1992
The first decline in UK gdp since 1992 means
that the economy is heading for recession. Growth contracted by 0.5% in Q3, after
being flat in Q2. On balance, it is likely that growth will fall again in Q4
though not by as much as in Q3, which saw
a bigger fall than expected as manufacturing output dropped across the board. The global and UK economic backdrop has
worsened significantly in the last 3 months, with the capital injections, government guarantees
and cuts in official interest rates doing little to calm financial markets, though some of the panic
in equity markets seems to have abated. Such has been the loss of confidence in financial markets that
all global leveraged positions are suspect, for countries, firms or industrial
sectors. UK growth in Q3 was
especially hit hard by the sharp rise in price inflation, weakening in wage
inflation and the increases in petrol, gas and electricity charges that cut
real household incomes quite sharply.
Last three months have
seen worsening economic and financial market data...
In the last three
months, manufacturing output has fallen ever more sharply and retail sales
growth slowed further, see chart a. Consequently, business and consumer
confidence have fallen steeply. It is not therefore surprising that consumer
spending and investment spending growth have turned negative, see chart b. Once
the detailed figures by expenditure are revealed (due end November), it is
likely that consumer and investment spending fell in Q3 as well as in Q2. Falls
in house prices, measured by the Halifax and Nationwide
indices, are of the order of 12-16% year on year, and home repossessions are
starting to rise strongly. Car sales are down and the fall in house prices and
in house sales have hit durable consumer spending particularly hard.
is rising and wage inflation is stagnant in the face of rising price inflation,
leading to further falls in real, or inflation adjusted, income growth. The
credit crisis has also led to tighter lending standards and to a wider spread,
meaning that libor rates remain high even though base rates have been cut. It
is surely no coincidence that the recent wave of financial market turmoil
intensified in the weeks following the collapse of Lehman Brothers, as it
highlighted the counterparty risk that financial institutions face. The subsequent
falls in equity markets and rise in volatility seems to have badly impacted
consumer and business confidence around the world.
A key question
therefore is whether this current UK economic downturn will
be as sharp as in the 1990s. Then, output fell about 2.5% peak to trough.
However, this imminent recession is likely to be shallower. Why is this? After
all, in the last recession the world economy was not in the grip of the worst
financial markets crisis in Start of recession compared Q3 1990 Q3 2008 decades and was
perhaps not as interconnected as it is now. But table 1 gives some of the
reasons why this slowdown may not be as steep. For a start, as chart c shows,
the UK gdp decline of 0.5% compares favourably with the 1.2% fall in 1990, and
this is over a year into the credit crisis that was predicted to have led to
recession much sooner and deeper than seen so far. Short term interest UK rates, including libor
rates, are a lot lower than they were in 1990. Base rates are much lower and so
are long term interest rates. The reason is that price inflation is also much
lower. In turn, this is helped by wage inflation, which is also much weaker,
giving scope for price inflation to ease and so for interest rates to be cut
below the current level of 4.5%. The pound is lower in trade weighted terms,
making the UK economy more
competitive, even though growth in overseas markets is slowing as well.
Table 1 also shows that
unemployment is much lower now than in 1990 on the claimant count basis, and would
have to be 750,000 higher than it is currently, just to match the starting
level of the early 1990's recession. All in all, these are not the sort of
starting level, at least from these figures, that suggest an economy about to
plunge into its deepest recession since the 1990s or the 1980s. However, this
does partly assume an aggressive policy response. But one does seem to be underway,
with government spending commitments of the order of Â£500bn so far and both tax
cuts and further spending increases are likely to be announced in the Autumn
Statement later this year. Official interest rates have been cut by 0.5% in one
coordinated global move in the past month, and a further fall of 1 percentage
point is likely by end-year taking UK base rate to 3.5%.
Where price inflation may eventually end up, with a loose fiscal and monetary
policy and a weakening currency is uncertain, though it may be that policy will
be tightened pretty sharply once recovery gets solidly underway.
...and the jury is
still out on whether this downturn will be shallow or steep
In any event, the focus
of fiscal and monetary policy is now targeted at mitigating the economic
slowdown, and solving the credit crisis. Of course, the eventual outcome of the
current downturn is very uncertain, more so than even in 1990. With falling
real wealth (equity and housing markets) and bank and financial institutions shrinking
their balance sheets, it is possible that the current economic downturn will be
as bad or worse than in earlier episodes. Although we would give this scenario
a much lower probability than a shallow recession, the jury is still out.
However, all recessions end, and the extent of this one will be clearer in a
few months, especially given the much more aggressive policy response that is
BoE and ECB to cut
interest rates by at least 50bp
presidential elections top the events calendar, as well as interest rate
decisions by the Bank of England and the ECB on
Thursday. Both central banks are likely to deliver at least a 50bp cut,
bringing UK base rates to 4% and euro
repo rates to 3.25%. It is possible, but in our view unlikely, that they cut by
100bp, both instead expected to act in line with the US Fed, which last week
cut its funding rate by 0.5% to 1%. Admittedly, the BoE and the ECB have much more
scope for lowering rates. But the ECB is likely to err on the side of caution
as far as taking risks on medium term inflation is concerned. In turn, the BoE
may not favour an asymmetric reduction vis-a-vis the ECB as it risks causing a further
fall in sterling. On the other hand it is possible that a 100bp cut,
representing a more aggressive UK economic stimulus
could be taken as a positive. Economic data in the run up to Thursday's
decisions will be gleaned for any early signs of Q4 performance and how this
will impact on decisions. In the UK, our view is that flat output is as likely
as contraction in Q4, as in Q3, GDP and net incomes took the hit from a massive
hike in utilities prices which will not be repeated. There is a danger of a
negative spiral, however, as economic surveys are very week and households are increasingly
concerned about job prospects, slowing their spending and so hitting company
sales. Eurozone Q3 GDP is not due until next week, but it is expected to
contract another 0.2%, meaning technical recession. October's US NFP jobs report could
show a loss of 180,000 jobs and a rise in the unemployment rate to 6.2% of the
workforce. The Reserve Bank of Australia will cut interest
rates by 50bp to 5.5% on Tuesday.
â€¢ UK business surveys and
official industrial output figures feature this week. PMI manufacturing and
service business surveys are due for October - the headline balance for manufacturing
rose to 41.5 from an upwardly revised 41.2 in September. The services PMI is
likely to fall to 45.0 from 46.0. Within the detail of the survey, we expect to
see further weakening in the input/output price and in the employment balances.
The construction activity PMI is also unlikely to show any great improvement.
Industrial production data for September is also published - this will complete
the data series showing contraction in each quarter this year. Manufacturing
output may fall 0.3% on a monthly basis and 1.6% annually. The NIESR rolling
three month GDP estimate for October may also point to economic weakness at the
start of Q4. Given the fact that this week's data will highlight the risk of
technical recession (two quarters of negative growth), we believe that the MPC
decision to cut interest rates on Thursday will be unanimous.
â€¢ PMI manufacturing and
service business surveys (final) also feature in the Eurozone and are likely to
confirm the preliminary balances of 41.3 and 46.9 in October. EU-15 retail
sales may have contracted in September, by 0.2% on the month and 2.1% on the
year, adding to the view that domestic demand is weak. The European Commission
releases its review of economic forecasts - there may be a significant downward
revision of economic growth and inflation projections compared with the earlier
release. All in all, given ECB President Trichet's comments last week and
prevailing economic weakness, it seems almost a certainty that the ECB will cut
its repo rate by up to 0.5%
â€¢ The US non-farm payroll
figure for October is likely to be very weak given survey reports, including
the survey of private nonfarm companies reporting lay offs. We expect a 180,000
fall in jobs for October, a deeper drop than the 159,000 outcome in September,
bringing the total number of job losses this year to 760,000. The unemployment
rate could rise 6.1% to 6.2% of the workforce, but we still expect average
earnings growth of 0.2% on the month. The ISM manufacturing and service
business surveys are also published - we expect further declines. Another key
indicator, non-farm productivity growth may have declined to 1.8% in Q3 from
4.3% in Q2 as firms' spare capacity continues to rise. Q3 annualised GDP contracted
by 0.3% and continued weakness so far in Q4 increases the chance that the US
Fed will cut interest rates below 1%.
Any documentation, reports, correspondence or other
material or information in whatever form be it electronic, textual or
otherwise is based on sources believed to be reliable, however neither the Bank
nor its directors, officers or employees warrant accuracy, completeness or
otherwise, or accept responsibility for any error, omission or other
inaccuracy, or for any consequences arising from any reliance upon such information.
The facts and data contained are not, and should under no circumstances be
treated as an offer or solicitation to offer, to buy or sell any product, nor
are they intended to be a substitute for commercial judgement or professional
or legal advice, and you should not act in reliance upon any of the facts and
data contained, without first obtaining professional advice relevant to your
circumstances. Expressions of opinion may be subject to change without notice.
Although warrants and/or derivative instruments can be utilised for the
management of investment risk, some of these products are unsuitable for many
investors. The facts and data contained are therefore not intended for the use
of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc.
Lloyds TSB Bank plc is authorised and regulated by the Financial Services
Authority and is a signatory to the Banking Codes, and represents only the
Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and
Forex Trading News
Daily Forex Market News Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Forex News Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."
Elevate Your Trading With The Amazing Trader!
The Amazing Trader includes:
Actionable trading levels delivered to YOUR charts in real-time.
POTENTIAL PRICE RISK: HIGH to Medium- Wed --14:15 GMT-- US- Industrial Production
POTENTIAL PRICE RISK: HIGH- Wed -- 15:00 GMT-- CA- Bank Of Canada Decision
John M. Bland, MBA co-founding Partner, Global-View.com
Max McKegg's Daily Forex Trading Forecasts
Veteran FX Trader, Max McKegg, forecasts all the Major currencies and the Australasians; providing Daily and Medium Term Trading forecasts to subscribers, who include large Banks the world over, as well as individual traders in more than 30 different countries.
looking for your first broker or do you need of a new one? There are
more critical things to consider than you might have thought.
We were trading long before there were online brokers. Global-View
has been directly involved with the industry since its infancy. We've
seen everything and are up-to-data with recent regulatory changes.
The Global-View Forex Forum is the hub for currency trading on the web. Founded in 1996, it was the original forex forum and is still the place where forex traders around the globe come 24/7 looking for currency trading ideas, breaking forex news, fx trading rumors, fx flows and more. This is where you can find a full suite of forex trading tools, including a complete fx database, forex chart points, live currency rates, and live fx charts. In addition, there is a forex brokers directory where you can compare forex brokers. There is also a forex brokers hotline where you can ask for help choosing a forex broker that meets your individual fx trading needs. Interact on the same venue to discuss forex trading.
The forex forum is where traders come to discuss the forex market. It is one of the few places where forex traders of all levels of experience, from novice to professionals, interact on the same venue to discuss forex trading. There is also the GVI Forex, which is a private subscription service where professional and experienced currency traders meet in a private forex forum. it is like a virtual forex trading room. This is open to forex traders of all levels of experience to view but only experienced currency tradingprofessionals can post.
Currency trading charts are updated daily using the forex trading ranges posted in the Global-View forex database. You will also find technical indicators on the fx trading charts, e.g. moving averages for currencies such as the EURUSD. This is another forex trading tool provided by Global-View.com.
The forex database can be used to access high, low, close daily forex ranges for key currency pairs, such as the EURUSD, USDJPY, USDCHF, GBPUSD, USDCAD, AUD, NZD and major crosses, including EURJPY, EURGBP, EURCHF, GBPJPY, GBPCHF and CHFJPY. Data for these currency trading pairs dating back to January 1, 1999 can be downloaded to an Excel spreadsheet.
Forex chart points are in a currency trading table that includes; latest fx tradinghigh-low-close range, Bollinger Bands, Fibonacci retracement levels, daily forex pivot points support and resistance levels, average daily forex range, MACD for the different currency trading pairs. You can look on the forex forum for updates when one of the fx trading tools is updated.
Global-View also offers a full fx trading chart gallery that includes fx pairs, such as the EURUSD, commodities, stocks and bonds. In a fx trading world where markets are integrated, the chart gallery is a valuable trading tool. Look for updates on the Forex Forum when the chart gallery is updated.
Global-View.com also offers a forex blog, where articles of interest for currency trading are posted throughout the day. The forex blog articles come from outside sources, including forex brokers research as well as from the professionals at Global-View.com. This forex blog includes the Daily Forex View, Market Chatter and technical forex blog updates. In additional to its real time forex forum, there are also Member Forums available for more in depth forex trading discussions.
WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES
CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN
EXCHANGE AND DERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE
PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE
INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC
REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL
SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR
SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS.