Economics Weekly - Data to show faster pace of contraction in US and UK in Q4 2008
Economics Weekly - 23
Data to show faster pace
of contraction in US and UK in Q4 2008
Revised estimates of GDP
in the final quarter of 2008 for the US and UK are published this week,
with both likely to lead to downward revisions to economic growth. The least
uncertainty surrounds the US, which could show an
annualised contraction of over 5% compared to a surprisingly â€˜modestâ€™ 3.8%
decline in the preliminary estimate last month. In the UK, weaker than expected
industrial output data suggest the economy contracted by 1.6% in Q4 2008
compared to 1.5% in the previous estimate. The first view of the expenditure breakdown
will be keenly awaited. We also expect confirmation that the German economy
contracted by 2.1% in Q4 2008. Recent indicators suggest large declines in GDP
are again likely in the first quarter of 2009 for most economies, leading to a
raft of official efforts to limit the impact on their struggling economies. We will
hear more about these measures and the economic outlook from a series of
central bank speakers this week, including Fed chairman Bernanke, ECB president
Trichet and BoE governor King. Financial markets will also be influenced by
corporate earnings updates and another heavy week of bond issuance in the US.
ô€‚„ Tight credit conditions and a sharp decline in business investment
and consumer spending led UK real GDP to contract sharply in the final quarter
of 2008, confirming the first recession since the early 1990s.The detail showed
output fell sharply in both service and manufacturing sectors, with quarter-on
quarter declines of a size not seen since the 1970s. However, a larger than
expected contraction in manufacturing output in December and small downward
revisions to previous months suggest that Q4 GDP growth may be revised down to
-1.6% from -1.5% in the preliminary estimate, the biggest fall since Q2 1980.
The expenditure components will also be published in the latest release. We
expect to see another sharp fall in investment, led by slumping housing-related
investment, while consumer spending is likely to have contracted more modestly.
Prospects for consumer spending are difficult to assess, in part reflecting
substantially lower interest rates and the reduction in VAT, however it is
likely to remain weak until consumer sentiment improves. The outlook for the
labour market and housing remain key uncertainties. The GfK publishes its
consumer confidence index on Friday, with a further fall to -39 forecast in February,
from -37 in January. With interest rates at record lows, we expect to see a
further fall in future saving intentions and an associated rise in the climate
for major purchases though rising unemployment will blunt this.
ô€‚„ The second estimate of US Q4 GDP is expected to lead to a sharp
downward revision to economic growth, primarily based on the December trade
figures which showed the inflation-adjusted deficit widened to $43.3bn from
$40.1bn in November. We look for annualised GDP growth to be revised down to
-5.2%, from -3.8% in the first estimate. Ahead of the GDP data, there are
likely to be further weak readings from consumer confidence, the housing and
labour market and durable goods orders, suggesting another sharp decline in
economic growth is likely in Q1 2009. Fed chairman Bernankeâ€™s semi-annual
monetary policy testimony before the Senate Banking Committee will also be
watched closely on Tuesday.
ô€‚„ Economic data from the euro zone this week are also expected to
show that another sharp contraction in GDP growth is likely in the first
quarter of 2009. Chart b shows the German IFO survey has been a particularly
reliable indicator of overall growth prospects. We look for a fall in the
headline index to 82.5 in February, from 83 in January, potentially the lowest
reading in over 25 years. Business and consumer confidence indices for the
region will also be watched closely this week. The first expenditure breakdown
of German GDP in Q4 2008 will be published on Wednesday. We expect to see a
very sharp decline in capital investment and exports.
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