Friday January 18, 2013 - 17:58:54 GMT
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ECONOMIC DATA ANALYSIS - UK SHOULD AVOID 'TRIPLE DIP' DESPITE DROP IN Q4
ECONOMIC DATA ANALYSIS FRIDAY 18 JANUARY 2013
UK SHOULD AVOID 'TRIPLE DIP' DESPITE DROP IN Q4
• UK GDP Q4 forecast to contract by 0.2%, but ‘triple dip’ recession unlikely
• BoJ expected to shift inflation target
• Euro area ‘flash’ PMIs to signal modest rise, but still suggest contraction
World leaders meet in Davos ... The coming week brings a number of key events for financial markets, not least the annual winter event where global leaders meet in Davos. To kick this off the IMF publishes its latest global growth update, which could soften given the weak close to 2012. US debt ceiling angst may also begin to take more of a toll. While US equities remain supported by some decent earnings report, US bond markets look less sanguine.
UK Q4 GDP set to contract ... In the UK, today’s last minute postponement of Prime Minister Cameron’s ‘speech on Europe’ may well see this rescheduled over the coming week. It looks likely to further underline the uncertainty over the UK’s future status in the EU - albeit that ‘advance extracts’ of today’s speech fell short of committing to a referendum. Otherwise, the first release of Q4 GDP on Friday will be the main focus. We forecast a drop of 0.2% on the quarter, although we acknowledge that this will in part reflect an unwind of the Olympic ticket sales effect in Q3, leaving the underlying pace flat. Moreover, Q4 has seen some exceptional changes - a collapse in North Sea oil production and a sharp slowdown in manufacturing, offset somewhat by a likely rise in construction output. Although a contraction in Q4 leaves the UK on the edge of an unprecedented triple dip recession, we think that some rebound in both of the above sectors and a post-Olympic hangover rise in services makes two quarters of contraction unlikely.
Yet monetary policy looks on hold for now ... The MPC accepts the chance of contraction in Q4 GDP and the coming week’s minutes are unlikely to set a different tone. More ebullient sentiment and the improvement in risk appetite keeps further QE unlikely in the short term, particularly while the labour market remains resilient. We forecast a small rise in jobless claims this month, but employment growth is likely to rise further. Finally, December’s public finances are likely to raise the chance of an overshoot of this year’s offical forecast.
BoJ to raise inflation target ... Japan will continue to be a global focus. The government’s Monthly Economic Report is likely to provide further evidence of the decline in Japanese activity driven by weaker international trade, reflecting
softer euro area demand and the Chinese territorial dispute. However, the Bank of Japan’s meeting will be the highlight. The BoJ is widely expected to defer to PM Abe’s political pressure and to increase its inflation target to 2% from
1%. A fresh wave of quantitative easing is also expected to accompany the announcement. The yen has already moved sharply on market expectations. But this will mark an interesting test case for other ‘independent’ central banks.
Evidence of an uptick in activity? ... The euro area sees a number of events. German Regional Elections in Lower Saxony on Sunday will be a forerunner of the Autumn General Elections – a key test for Chancellor Merkel and potential coalition partners. Euro area finance ministers meetings will likely be overshadowed by ECB President Draghi’s Frankfurt speech on Monday. While Mr Draghi is likely to remain cautiously optimistic on the euro area outlook, concerns - about growth rather than fragmentation - remain. January’s surveys may help. German ZEW and IfO surveys are both likely to point to a more positive start to 2013. And while we expect a modest rise in the ‘flash’ PMIs, these look set to remain in contractionary territory for the euro area as a whole. With fragmentation fears subsiding for now, markets are starting to unwind some of the ECB’s stimulus and the euro has risen. While we expect a stabilisation in euro area growth, there is ample scope for disappointment and a re-awakening of tail-risk fear.
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