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ECONOMIC DATA ANALYSIS - UK Q2 GDP LIKELY TO BE REVISED HIGHER
ECONOMIC DATA ANALYSIS FRIDAY 17 - 23 AUGUST 2012
UK Q2 GDP LIKELY TO BE REVISED HIGHER
• UK Q2 GDP growth likely to be revised higher to -0.4% from -0.7%.
• US FOMC minutes combine with CBO’s latest outlook to shape expectations of more QE.
• Euro area ‘flash’ PMIs to continue to point to contraction across H2 2012.
Sanguine trade in thin summer markets ... While financial market activity slips deeper into its summer lull, thin market conditions have combined with a more sanguine outlook. Equity markets have risen, including a near 2% rise in the FTSE €300 index which is at highest since early April. Peripheral euro area bond spreads have tightened and ‘core’ bond markets sold off, including the UK ten-year gilt where the yield has risen by 15bps on the previous week. These movements occurred against, on balance, slightly better economic news. The coming week sees a key UK GDP release and in the US attention remains focused on the monetary policy outlook in the light of upcoming fiscal tightening.
UK GDP set for upward revision ... Domestically the focus returns to the extreme uncertainty and volatility surrounding official data, with the first revision to Q2 GDP due on Friday. The initial estimate of -0.7% (qoq) surprised the market, but included estimated declines for industrial and construction activity that have subsequently been revised higher, with official figures appearing to have initially overestimated the scale of the bank holiday effect. We suspect this will be mirrored in services (latest update also Friday) and should result in an upward revision to overall GDP growth to -0.4%. This would be the biggest revision to a first estimate since the last Jubilee bank holiday effect a decade ago. It is also in line with our view a month ago that GDP would be just below -0.2% after the initial estimate. As chart 1 shows, the ‘true’ economic picture only emerges over a longer time horizon. We suspect further upward revisions are likely over this time scale. The coming week also posts the latest public finances update. These should show continued slippage in the finances against the previous year.
FOMC minutes prelude to Jackson Hole, ‘fiscal cliff ‘ focus ... Wednesday’s FOMC minutes from the August meeting will be scanned for clues for the Fed’s next policy decision on September 13, particularly ahead of Fed Chairman Bernanke’s influential Jackson Hole address at the end of this month. Economic signals have been mixed. Survey evidence remains weak, but official data have been firmer, including retail sales, industrial production and labour market releases. Housing data have also improved - often a harbinger of wider economic recovery. We await the coming week’s home sales numbers in the light of firming NAHB evidence. Fed officials have expressed differing views on the outlook for monetary policy, but few voting members have spoken. The outlook for the ‘fiscal cliff’ is pivotal. The Congressional Budget Office (CBO) estimates the currently legislated fiscal tightening at 4½% of GDP, resulting in a 1½% contraction in GDP in H1 2013. The CBO’s latest Budget and Economic Outlook on Wednesday will update these forecasts. Any significant change could have a marked impact on markets, to the extent that this influences market perception about the prospect for further QE.
Euro area economic outlook remains subdued ... This week’s official estimates confirming renewed contraction across the euro area in Q2 will be superseded by surveys this week signaling the outlook for Q3. Our global team forecasts a modest improvement in the ‘flash’ PMI estimates for August, in part reflecting the reaction to the ECB’s latest policy statement. However, these surveys continue to suggest contraction across the euro area as a whole, and the currency union looks set to contract across H2 2012. The sanguine outlook largely appears to reflect diminishing concerns over the euro crisis. Key will be whether this more upbeat phase persists as euro area policy makers reconvene in early September.
UK DATA PREVIEW FRIDAY 17 - 23 AUGUST 2012
GDP (Q2, 1st release) The preliminary estimate of Q2 GDP suggested that the economy contracted by 0.7%, keeping the UK in recession for a third consecutive quarter. Since then, the subsequent release of stronger construction and industrial output for June suggests an overall upward revision of 0.2% to Q2 output. We also suspect that services output will also be revised higher (see index of services below). In the absence of further revisions, the quarterly reading is expected to be revised higher to -0.4% from -0.7%. The release will also provide the first insight into the demand components of GDP. Q2 retail sales are estimated to have fallen by 0.3%, less than the -0.7% estimated previously and adds weight to the view that overall household consumption in Q2 may not be as weak as previously thought.
Index of services (Jun) Official preliminary estimates of service sector activity in Q2 recorded a contraction of 0.1%. Following May’s estimated 0.9% rise in services, this suggests a decline of just over 2¼% on the month in June, reflecting the impact of the additional bank holidays. The bank holiday impact on services is less obvious than other sectors with some services subsectors benefitting (eg retail, hotels), with others adversely affected (eg business services, transport). A 2¼% drop in June would be consistent with June 2002’s 2.4% drop. However, first estimates of ‘bank holiday effects’ in industrial and construction sectors were also consistent with 2002’s declines, only to have been revised significantly higher in the monthly releases (as above). We see this as a risk for these figures and forecast a smaller drop in June of 1.7%. This would see services flat in Q2 as a whole.
Public finances (Jul) The public finances started 2012-13 on the back foot and July looks likely to compound this disappointment. Last July the finances benefited from both a sharp rise in receipts and a temporary drop in government spending, which look unlikely to be repeated. We forecast a surplus in July (excluding financial interventions) of just £0.1bn, compared with last year’s £2.8bn. This would leave the deficit some £10bn higher than at the same time last year (after allowing for April ’s one-off transfers). We doubt that the underlying finances are deteriorating so sharply and are wary of revisions associated with the new payment collection system. Yet the softer growth outlook will make March’s Budget 2012 forecast of £92bn a challenge.
CBI Distributive Trades Survey (Aug) The official retail sales release provided little indication that there had been any pre-Olympic boost to retailers last month. Ahead of the official release for August, the CBI distributive trades survey will provide the first insight into how much added impact, if any, the Olympics had on retail activity this month. The survey has suggested that reported annual sales and orders have continued to rise, but increases have been far slower than retailers they had previously anticipated. Nevertheless, the expected sales balance points to a further slowdown i n annual sales growth consistent with the weak level of consumer confidence and subdued wage growth, as such conditions for retailers remains challenging.
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