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Economics Weekly - UK detailed GDP in the spotlight

Economics Weekly - 18 May 2009


UK detailed GDP in the spotlight

UK data this week will highlight the growing impact of the recession on consumers, as increased uncertainty and rising unemployment change their saving and spending patterns. The first view of the expenditure components of Q1 2009 GDP are published on Friday, with another sharp fall expected in consumer spending, while changes to the methodology used by the ONS to calculate retail sales volumes pose a downside risk to figures for April due on Thursday. News on Tuesday that inflation edged lower again in April, with annual RPI estimated to fall to -0.8%, may provide little comfort. The minutes of the Bank of England MPC meeting on 6-7 May should underline the predictions in last week’s Inflation Report of a large negative output gap, helping to explain the committee’s decision to increase the asset purchase programme by £50bn to £125bn, as the risk of deflation remains high. The minutes of the 29 April US FOMC meeting are also published on Wednesday. After the very weak euro zone GDP data for the first quarter, there will be keen interest in the flash PMI figures for May on Thursday, where we expect a modest rise in both the manufacturing and services indices. However, they remain well below the 50 level, indicating contraction. The first estimate of Japan Q1 2009 GDP on Wednesday could potentially show a fall of over 5% q/q. The BoJ meets on Friday, when we expect the overnight rate to stay at 0.1%, however other policy measures are possible. Key speakers this week include Fed chairman Bernanke and US Treasury Secretary Geithner.


􀂄 The main message from the Bank of England’s May Inflation Report, which was published last week, was that the UK economic outlook remained very uncertain. We agree with this, as while recent data have provided some optimism that the pace of decline is moderating, output is still falling and the sharp pick up in unemployment makes it difficult to be confident of a swift return to growth. We expect confirmation on Friday that UK real GDP contracted by 1.9% in the first quarter of this year, the biggest since Q3 1979, driven by falling services output, with manufacturing also collapsing by the most on record. The first view of the expenditure breakdown is expected to show consumer spending fell by 1.5% in Q1 2009, following on from a 1% fall in the previous quarter. Although retail spending has held up surprisingly well, spending on consumer services and vehicles is under severe pressure, while rising unemployment and falling household incomes do not suggest a turnaround can be expected anytime soon. Gross fixed capital formation is also likely to show a sharper drop compared to the previous quarter, reflecting falling business investment and further declines in housing-related investment. Aggressive de-stocking, as companies adjust inventories for the potential sharp fall in demand, is likely to have remained a significant drag on overall GDP in the first quarter. However, its effect should ease in coming quarters, primarily reflecting the fact it has been much more severe than in previous recessions.


Further information on economic activity in Q2 will be provided by data on retail sales and industrial activity this week. The ONS confirmed last week that a change to their methodology will result in lower estimates of the volume of retail sales. The data for April are published on Thursday. The headline total orders index of the CBI industrial trends survey is expected to show conditions remained challenging in May, indicating that recovery is unlikely in Q3. Inflation data on Tuesday are likely to show further declines in annual rates for CPI and RPI, however monthly rises could be quite strong, in part reflecting changes in Budget 2009. We expect annual CPI inflation to ease to 2.7% in April, from 2.9% in March. On Thursday, the first public finances data of this fiscal year are forecast to show a further sharp deterioration, with net borrowing sharply higher than £1.9bn in April 2008. We expect the minutes of the BoE MPC 6-7 May meeting to show that the decision to maintain Bank rate at 0.5% and to increase the asset purchase programme by £50bn to £125bn was unanimous.


􀂄 The minutes of the 29 April US FOMC meeting are published on Wednesday. We expect to hear that members were slightly more confident about US growth prospects, underpinning unchanged interest rates and asset purchases. In a quiet week for US data, housing starts and building permits are forecast to have picked up modestly in April. Initial jobless claims are expected to be close to the four week average of 630K. In the euro zone, flash estimates of the May manufacturing and services PMIs on Thursday are likely to show a further modest improvement, though still remaining well into contraction territory, particularly manufacturing. The German ZEW survey is forecast to consolidate on the sharp improvement seen in April, rising to +15 from +13 (highest level since June 2007), reflecting the recent rally in global equity markets.

Jeavon Lolay, Senior Economist, Corporate Markets

Page 4


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