Economics Weekly - UK to see positive economic growth in Q1 2010; Weekly economic data preview - Central banks, except perhaps the RBA, are set to leave rates on hold
Economics Weekly - 5 April 2010
UK to see positive economic growth in Q1
UK economic growth revised up in Q4
In this weekly, we focus on the recent trends in UK GDP and the
prospects for growth in Q1 2010.
Paradoxically, the upward revision to UK GDP growth in Q4 of 2009,
to 0.4% from 0.3%, also saw a downward revision to growth in earlier years.
Hence, the peak to trough fall in UK gdp during the recession just ended is 6.3%, down from 6.2% in
the previous release of the data. For 2009 as a whole, there was a fall of 4.9%
in GDP, the biggest fall in any single year since the figures have been
recorded on this basis.
Moreover, the UKâ€™s recovery from recession has been slower and the downturn deeper
than that of the average of the G7 economies. UK economic growth fell for six consecutive quarters, from Q2 2008
to Q3 2009, whilst the average fall in the other G7 countries was four consecutive
...but earlier figures were revised lower, meaning the recession
was even deeper than first thought...
We have identified the high degree of leverage in the UK as one of the reasons why the UKâ€™s recovery has taken longer than in some other economies. Another
reason, is the high share of the economy accounted for by services, which fell
sharply in the recession. Given that the downturn was exacerbated by a global
financial crisis, one of the features of the recession of 2008/2009 is that
services output has contracted more than any other sector. In all the
recessions since the 1960s, falls in services output have been modest to
nonexistent. But in this downturn, services output has fallen by around 3.5%,
see chart b. This makes this recession unique in recent UK economic history, and explains why the decline in the level of
GDP has been so pronounced.
...but growth in Q1 was likely in line with Q4 2009
Looking to prospects for GDP in Q1 and the remainder of the year,
monthly economic data so far released suggest that the recovery will be uneven.
However, expansion at a similar pace to Q4 2009 is likely in Q1 (0.3-0.5%), but
Q2 and Q3 could be more of a struggle, partly due to Budget and election
uncertainty. In any event, the March Budget does not so far seem to have altered expectations about the path of the economy.
Whether a later Budget has any impact remains to be seen. We look for UK economic growth of around 1% this year, with recovery to just
above 2% growth in 2011.
Although growth needs to come from net exports, some revival of
consumer spending is still crucial
There has been a very sharp rise in household saving rates in the UK, hitting a peak of 8.4% in Q3 2009, see chart d. This means that
for economic growth to resume at a decent pace, that ratio must stabilise at
around 7-8%. With business investment spending likely to remain weak as
companies adjust their balance sheets, the onus will be on stocks and net
exports to drive the modest economic recovery we expect in 2010. However, as
chart c shows, given the 70% share of GDP taken by consumer spending, about
half of the expansion in GDP this year will still come from that source.
The challenge for the UK is that a weak currency, which it currently has, is not enough to
drive economic recovery: a focus on key fast growing export markets is also
required. Nevertheless, with a large negative output gap, price inflation will
fall back later in 2010. Hence, we look for official interest rates to remain
low through 2010 and a Bank Rate of 0.5% will likely carry over to 2011.
However, we would expect longer-term money market rates to remain much more volatile.
Central banks, except perhaps the RBA,
are set to leave rates on hold
ô€‚„ Several major
central banks take monetary policy decisions this week, but the most
contentious could be the Reserve Bank of Australia, where interest rates may remain on hold at 4%, but with a
significant risk of a quarter-point hike. The RBA lately has increased the
emphasis on a measured pace of tightening, having already raised rates from a
low of 3% in the past six months. In contrast, the Bank of England, Bank of
Japan and European Central Bank are all expected to leave interest rates firmly
unchanged. Moreover, the BoE is not expected to change its asset purchase
target at Â£200bn. ECB President Jean-Claude Trichet may confirm the decision to
continue to accept BBB- debt as collateral next year, as part of measures to
support Greece. No doubt he will try to convince the markets that policy
frictions in the euro zone have been resolved, but investors may beg to differ,
with Greece set refinance about â‚¬20bn of debt in this quarter alone.
ô€‚„ In terms of
European data, UK services PMI and industrial production will probably attract the
most attention. German factory orders and final estimates of euro zone services
PMI and Q4 GDP are worth more than cursory glance. Indeed, German orders are
forecast to accelerate to around 21.4% on the year, the highest annual rate of
growth since reunification, though of course the numbers are flattered by
favourable base effects resulting from the collapse in world trade activity a
year ago. We were a little surprised by the rise in the UK manufacturing PMI last week, but for the services PMI we still
think a fallback from a very strong reading in February is likely and have
pencilled in a forecast of 57.5 from 58.4, though this would still be
significantly above the 50 no-change level. The ONS release of February industrial
production, which we see rising 0.5% in the month, will help provide a firmer
view on the official GDP growth estimate for Q1 (not due until Apr 23), though the National
Institute for Economic and Social Research (NIESR) will make an unofficial stab
at the number next week. Our own view is for a 0.3% quarterly rise in GDP.
ô€‚„ Eyes will be drawn
to the US pending home sales figures on Monday to gauge conditions in the
fragile housing market, after the surprise month decline of 7.6% in February, blamed
largely on poor weather conditions. President Obamaâ€™s extension of first-time
buyer credit last November for property sales that close by June 30th should
help to buoy the market over the next couple of months and we expect the pace
of decline in pending home sales to slow, falling by 0.4% in March. Housing will be a recurring theme during the week as we
expect Tuesdayâ€™s release of FOMC minutes to expand on the decision to halt the
buying of mortgage-backed securities at the end of March, completing the $1.25 trillion
programme instituted in November 2008. Markets will look for reassurance that
the Fed will reverse that decision if necessary. Further comments in the
minutes or public statements from Mr Bernanke on Wednesday are expected to confirm
rates will remain on hold, until more consistent evidence of a sustained
economic recovery materialises. Thursdayâ€™s initial jobless claims are forecast
to continue their downward trend to 435,000, with the 4-week average falling to
the lowest level since September 2008. The US Treasury will be undertaking a
number of auctions throughout the week including $74bn of 3-year notes, 10-year
notes and 30-year bonds, and $8bn of 10-year TIPS.
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