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ECONOMIC DATA ANALYSIS - INFLATION REPORT IN FOCUS
ECONOMIC DATA ANALYSIS FRIDAY 3 - 10 AUGUST 2012
INFLATION REPORT IN FOCUS
• BoE’s Inflation Report likely to include downward revisions to growth and inflation projections.
• Releases for June to remove some uncertainty over bank holiday impact on UK economy.
• July’s Chinese releases to suggest activity is firming.
Initial market reaction belies some merit to ECB’s latest proposals ... Market reaction to the ECB’s failure to provide instant relief was predictable. Spanish 10-year yields rose back above the psychologically important 7%, but remain below the level before ECB President Draghi’s recent comments. The ECB’s plan of standing ready to supplement EFSF/ESM bond purchases increases the potential firepower of these funds to contain financial market contagion. This could ease the current crisis if Spain’s (and possibly Italy’s) government chooses to ask for support. In turn, this could bolster confidence and improve growth prospects. In the short term, the crisis is likely to continue to generate headwinds to activity.
China is the global focus ... The coming week sees few global releases, except the latest monthly news from China. July’s releases should continue to suggest firmer activity in China, with fixed investment increasingly boosted by local government spending and an acceleration in industrial output consistent with recent PMIs. We believe Chinese activity reached a nadir at the start of 2012 and has been firming since. Soft import growth has exacerbated concerns, but we think these numbers are exaggerating import weakness particularly in raw commodities. We forecast further monetary policy easing across Q3, but with the aim of supporting recovery.
Downbeat Inflation Report ... The MPC chose to leave policy unchanged this week and the coming week will provide some insight into the Committee’s thinking as the Governor presents the latest quarterly Inflation Report. Within weeks of May’s Report, Governor King suggested it had become dated and was voting for further stimulus, which the Committee eventually adopted in July. August’s Report looks set to catch up with this outlook and we expect the Bank to revise both its GDP and inflation projections, the latter impacted by the decline in global commodity prices. Governor King’s recent press conferences have adopted a more downbeat tone than the broader Report and we expect a continued focus on the impact of the euro area crisis on the UK economy as a whole.
June’s data details bank holiday effect ... Thencoming week should start to clear the uncertainty surrounding UK activity. The coming week sees June’s industrial and construction sector updates, which will replace the official estimates included in the preliminary Q2 GDP release. Much uncertainty surrounds the impact of the bank holiday effect and the upcoming data will define the scale of decline in June. We estimate that while manufacturing output may be revised lower
than the initial estimate, the wider industrial measure should be revised a touch firmer to -1.2% (from -1.3%). This is unlikely to be sufficient to see GDP as a whole revised higher in the next release, although we hold out the possibility that Q2 could eventually be revised higher after the full revision process.
Little US guidance ... Today’s US payrolls report was ambiguous for the outlook for the US. The last time the Federal Reserve used outright QE, in late 2010, payrolls had contracted from June to September inclusive. The employment report is far from suggesting this scale of weakness and is more in keeping with the sub-100ks that prompted ‘operation twist’ in 2011 and in the current phase. The latest Fed meeting stated that it would “closely monitor” developments and provide additional accommodation as needed. Our global team expects to see QE in September, a view becoming increasingly widespread in financial markets. There is little this week to provide further evidence on the US economy, which will leave markets even more focused on global developments.
UK DATA PREVIEW FRIDAY 3 - 10 AUGUST 2012
BoE Inflation Report (Aug) Inflation Reports are often important for monetary policy, the medium-term projections providing a framework for the MPC to determine and explain policy. Yet May’s Report was quickly outdated. Governor King argued within weeks of the last Report that the outlook had deteriorated. He voted to reverse policy at the very next meeting. This Report will catch-up with that MPC view. We expect growth to be revised lower from the 0.7% and 2.1% forecasts for 2012 an 2013 in May, in line with a softening in our own outlook. Inflation projections are also likely to be lowered, reflecting softer global prices in the short term and weaker acivity over the medium term. Policy preceded forecast this time and the MPC’s next moves wil l follow an evaluation of the effectiveness of that policy over the coming months.
Industrial production (Jun) Q2 GDP contained implicit estimates for output in June. If these were too low, actual data may lead to an upward revision of Q2 GDP. Implied drops in electricity and gas output (around -4.7% on the month) and water (-6.1%) suggest just that. In June 2002, the last additional bank holiday, output fellby only 1.7% and 0.0% respectively. Indeed, June’s implied water supply drop would be the largest since May 1989. However, while we expect upward revisions here, the larger manufacturing sector is expected to move the other way. The ONS has pencilled in a drop of 4.8% in June, not as sharp as the declines posted in previous Jubilees in 2002 (-5.6%) and 1977 (-4.9%). We forecast this being revised down to -5.3% in June. In total industrial output may be revised a little higher on the quarter (to -1.1% from -1.2%), but this would likely be insufficient to boost Q2 GDP.
Trade (Jun) May’s trade deficit narrowed sharply to -£8.4bn, driven by strong export growth to both EU (4.8%) and non-EU (10.9%) destinations, albeit following a sharp drop the previous month. Nevertheless, survey evidence suggests that the prospect for further improvement is limited and the trend in exports is likely to remain subdued, driven by the deteriorating global outlook. We forecast a widening of the deficit in June to £8.75bn, reversing much of May’s improvement and indicative of the weak level of demand from key export markets. This reflects our outlook that net trade will act as a drag on 2012 GDP growth. The prospect of ‘rebalancing’ the domestic economy looks set to remain on hold until the global outlook begins to show clearer signs of improvement.
Producer prices (Jul) The combination of rising oil prices and the fall in sterling last month look set to deliver the first pick up in input price inflation since March. Following sharp falls in recent months, not least June’s 2.2% drop, we expect input prices to have risen by 2.4%, driven primarily by a 7.2% drop in crude oil and agricultural goods prices. This is likely to be reflected in output prices. We forecast a 0.3% rise in the headline measure, while ‘core’ prices are expected to show a more modest 0.1% rise. Nevertheless, the annual rate of input price inflation is expected to remain negative at -0.6%, while output prices are also expected to hold close to current levels and are unlikely to prove an obstacle to the softer near-term outlook for CPI inflation.
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