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ECONOMIC DATA ANALYSIS - AN OLYMPIC CHALLENGE
ECONOMIC DATA ANALYSIS FRIDAY 20 - 27 JULY 2012
AN OLYMPIC CHALLENGE
• UK Q2 GDP first release likely to post -0.2%, but impacted by additional bank holiday.
• US Q2 GDP likely to grow by modest 1.3%, outlook for Q3 is mixed for now.
• First euro area surveys for Q3 likely to remain stable, but Spain threatens.
Olympics opening ceremony ... After seven years of waiting, next Friday sees the opening ceremony of the London 2012 Olympics. With building work complete, security in place and the weather forecast to settle, the eyes of the world will fall on this spectacle. Hopes are riding high on a sterling performance from Team GB (see Chart A). From a more mundane perspective, the Olympic effect and its aftermath will only add to the confusion about the underlying performance of the UK economy. This week’s surprisingly strong employment figures were clearly impacted by a pre-Olympic boost. Potential volatility caused by the Olympics and its aftermath will add to policy makers difficulties in assessing the impact of the policy stimuli that have been put in place in recent weeks.
UK Q2 GDP main focus ... Beyond the Olympic park, our main focus for the coming week will be on the first estimate of Q2 GDP in the UK. With the economy having relapsed into recession in Q1 our forecast for a further contraction would see the economy fall for a third consecutive quarter. However, the contraction in Q2 is likely to be driven by special factors - namely the lost output from an additional bank holiday, with underlying growth returning into positive territory - just. But estimating the scale of the impact is fraught with uncertainty. The preliminary release on Wednesday will be made with early estimates for June’s output. We suspect that official estimates of the scale of the bank holiday effect will be cautious at this initial stage and expect this release to point to a 0.2% contraction. However, we would not be surprised to see this revised lower in subsequent releases.
US Q2 GDP due in coming week ... US Q2 GDP will not be distorted by an additional bank holiday. However, US activity has been relatively disappointing. Q2 looks set to post modest growth of 1.3% (annualised) - a pace similar, we think, to the UK’s underlying rate, but the weakest for a year. The economy has suffered from rising oil prices impacting on gasoline and weaker jobs growth. Despite the recent pick-up, oil prices generally fell over Q2 and should boost
activity in the current quarter.
Data disappointment could spur Fed ... Yet the US ‘fiscal cliff’ is increasingly weighing on activity, with the Fed’s latest Beige Book citing it as a factor in ‘tepid’ labour market activity. This is likely to limit the scale of rebound across the second half of this year. Preliminary data for Q3 have also been mixed, including yesterday’s disappointing Philadelphia Fed survey. With our expectation for 2012 growth as a whole already only around 2%, we think that the Federal Reserve may not tolerate a further softening in activity. Our global team expects modest stimulus at the upcoming FOMC meeting and expects the Fed to resume QE in September.
Euro area GDP contracting, with peripheral risks remaining ... First estimates of euro area Q2 GDP are not released until mid-August and at this stage we estimate a contraction of around 0.4% across the currency union as a whole. The focus this week will fall on preliminary survey evidence for July in the form of the ‘flash’ estimates of the PMIs and national indicators, including the German IfO survey. Our global team sees these as levelling out this month, which may form the base for modest improvement over the coming months. However, a disappointing Spanish auction yesterday contributed to pushing the Spanish 10-year bond yield back over the psychologically important 7% level, despite the German ratification of the bail-out package. Risks remain of a worsening of the euro area crisis over the summer. The peripheral countries, in particular, face a truly Olympic challenge.
UK DATA PREVIEW FRIDAY 20 - 27 JULY 2012
GDP (Q2, 1st release) Having posted two quarters of contraction the first estimate of Q2 is likely to record a further decline. This looks likely to be the result of the additional bank holiday and loss of output in June, but the scale of this effect is highly uncertain. History provides some clues with a similar effect from the Golden Jubilee in June 2002. We draw several conclusions form this. The scale of manufacturing output loss could be large. Coupled with what looks like another sharp decline in construction, reflecting heavy rainfall, this could lead to a marked drop in output in Q2. However, ten years ago the first estimate of GDP was 0.3% points higher than the subsequent estimates. We believe that ONS will be cautious over the scale of drop initially and pencil in a fall of just 0.2%.
Index of services (May) The index of services will be subject to some of the same uncertainties over the timing of bank holidays as other areas of the economy. The output of services in May is thus likely to see a boost from the additional working day (reflecting the shift in the May bank holiday to June). This contributed to manufacturing output rising by 1.2%. We pencil in a more modest 0.9% rise in services as a whole and would expect key businesses and transport service sub-sectors to see a slightly larger rise. However, as with other areas of the economy, this is only half the story. The following month’s additional bank holiday should see a sharp reversal. The first estimate of this will be included in Q2’s GDP releases, but the underlying trend in services is likely to take longer to discern.
CBI Industrial Trends (Jul) Despite some improvement in the manufacturing PMI and the CBI survey last month, industrial activity remains depressed. Faced with ongoing tensions in the euro area and a stagnation in domestic demand, the prospects of any meaningful recovery in manufacturing activity over the coming months remains remote. Nevertheless, there are tentative signs that the degree of pessimism in the sector may be fading. Notably, the export orders balance improved in June, albeit remaining in negative territory. Surprisingly, given events in Europe, the biggest challenge facing UK manufacturers appears to be the weakness of domestic orders. According to the survey, total order books remain much weaker than export orders. The July CBI survey will provide an update on how conditions are faring as we move through Q3.
BBA mortgage approvals (Jun) According to the latest RICS survey, housing market activity continues to slow. The report pointed to activity losing momentum, with falls in the newly agreed sales balance, new buyer enquiries and new vendor instructions falling back. In line with this downturn in activity, last month’s BBA report showed that net lending fell for the first time in May as households repaid more debt than they borrowed for the first time in over 15 years. Similarly, approvals for house purchase remain 20% below the level seen at the start of the year. While recent measures aimed at increasing credit availability could provide some boost to activity once implemented, there is little in the short term to suggest that approvals will be little more than subdued over the coming months.
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