Monday November 8, 2010 - 10:47:07 GMT
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Economics Weekly - Are Irish eyes really smiling?
Economics Weekly - 8 November 2010
Are Irish eyes really smiling?
Ireland may only account for 1-2% of euro-zone GDP, but it is punching above its weight at the moment. The Irish government has front-loaded its 4-year â‚¬15bn tightening programme to incorporate a â‚¬6bn adjustment next year alone, with the aim of lowering the deficit to around 9.25% of GDP versus an expected â‚¬12bn or so this year (excluding bank bail-out costs). But as yet, financial markets seem unconvinced. The 10-year Irish yield spread over German bunds remains high at well over 500bp, while Irish 5-year CDS remain â€˜stickyâ€™. The threat to the euro-zone recovery from volatility in peripheral government bond markets is alive and well in our view.
This weekâ€™s data highlight will be the preliminary estimate of Q3 GDP, where we look for growth of 0.4% quarter-on-quarter after a 1.0% outturn in Q2. The latter was flattered by weak activity in Q1, so a pull-back in Q3 always seemed likely. For Germany, we see Q3 GDP growth at 0.7% after an impressive 2.2% in Q2.
In the UK, the focus this week is on Novemberâ€™s BoE Quarterly Inflation Report, which should offer guidance on the near-term policy outlook. Fundamentally, the â€˜big pictureâ€™ has not changed since August, which means that the Bank is unlikely to alter materially either its growth or inflation forecasts. But on the back of stronger-that-expected Q3 GDP, the 2010 full-year growth projection is likely to be revised slightly higher from 1.6%. The more important consideration, however, is whether the Bank maintains its fairly optimistic forecast for growth in 2011 (2.6%, versus our own 1.9% estimate), given the recent deterioration in some UK indicators. Either way, the Governor will almost certainly stress both the upside and the downside risks to the forecasts, maintaining that the decision on the need for further QE remains entirely data-dependent. Our central view is that an expansion of the QE programme is likely, but the Bank will need to see clearer evidence that the recovery is stalling before taking action. In terms of economic data, the UK calendar is light, with manufacturing output data for September expected to confirm fairly strong growth during the third quarter.
Unsurprisingly, the US Federal Reserveâ€™s decision to embark on additional asset purchases grabbed almost all the attention in markets last week. For choice, we feel that a further phase of quantitative easing will boost nominal demand sufficiently to achieve price stability and improve labour market conditions in the medium term. More immediately, this weekâ€™s data calendar is light, with September trade figures and Novemberâ€™s preliminary Michigan consumer confidence data the main highlights. On trade, we see a narrowing in the trade deficit to $45.5bn in September, from $46.3bn â€“ although we note the shortfall has been trending higher since the middle of last year. On consumer confidence, we look for the Michigan index to register 68.0 in November, from 67.7 previously.
In emerging markets, the advance estimate of Q3 GDP in Russia is released towards the end of this week. An extreme heatwave has affected growth during H2, with the agricultural sector bearing the brunt of the impact and construction and manufacturing activity also suffering. Monthly indicators suggest the real economy contracted on a seasonally adjusted basis in Q3. We expect the official data to show that the annual growth rate slowed to 3.2%, from 5.2% in Q2.
Lloyds TSB Corporate Markets Economic Research, 10 Gresham Street, London, EC2V 7AE, Switchboard: 0207 626 1500. www.lloydstsbcorporatemarkets.com Bloomberg: LLOY<GO>
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