GDP, Public Finances and Bank of England Minutes Feature in UK Economic Releases w/c 20 February
GDP contraction in the fourth quarter of 2011 is expected to be confirmed at 0.2% quarter-on-quarter. There are very encouraging signs that economic activity picked up markedly overall in January. The CBI’s industrial trends survey for February will provide the first insight as to whether this apparent improvement was sustained into February.
GDP in Fourth Quarter 2011
Data on Friday are expected to confirm that GDP contracted by 0.2% quarter-on-quarter in the fourth quarter of 2011, thereby limiting year-on-year growth to just 0.8%.
The preliminary national accounts data were based on the output side of the economy and showed that GDP was dragged down in the fourth quarter of 2011 by a sharp decline in industrial production and a more modest drop in construction. Output in the dominant services sector was flat. Subsequently, released industrial production and construction output data deviate very little from the estimated data and there is no new hard data on the services front, so there is no reason to expect a major revision to the first GDP estimate on the output side of the economy.
The second release of the fourth-quarter 2011 GDP data will contain a breakdown of activity on the expenditure side of the economy. We suspect that GDP was dragged down by weaker business investment as companies reacted to soft activity and a worrying and uncertain outlook. In addition, it is likely that stocks were run down appreciably after a build-up added 0.6 percentage point to GDP growth in the third quarter. Meanwhile, government spending and investment could well have been pared as fiscal tightening measures increasingly kicked in.
On the positive side, consumer spending could well have expanded modestly in the fourth quarter, as a 1.1% quarter-on-quarter increase in retail sales volumes outweighed muted spending on services (indicated by the 0.5% quarter-on-quarter drop in the output of the distribution, hotels, and catering sector). Spending on retail sales was clearly lifted in the fourth quarter by increased discounting, as worried retailers strived to get pressurized and worried consumers to part with their cash. Even so, consumers were likely keen to limit their overall spending due to the pressures on them stemming from relatively high and rising unemployment, muted wage growth, still high inflation, tight fiscal policy and elevated debt levels. It also seems likely that net trade made a positive contribution to GDP in the fourth quarter as trade data for October-December were significantly improved overall compared to the third quarter. Exports were surprisingly decent despite muted global growth (especially probable recession in the Eurozone).
We now believe that the United Kingdom will achieve modest growth in the first quarter, although we still expect the economy to be essentially flat over the first half of the year before sustainable modest growth gets underway in the second half. So while we believe that the United Kingdom will avoid recession, we expect GDP growth to be limited to around 0.5% in 2012, improving to 1.6% in 2013.
Despite recent encouraging signs of improvement, we suspect that the UK economy is not yet out of the words and expect activity to be limited through the first half of 2012 by ongoing serious domestic and international headwinds, notably including still squeezed consumer purchasing power, rising unemployment, a reluctance of business to invest in worrying and uncertain circumstances, tighter credit conditions, reduced public spending and investment, and muted global economic activity (particularly in the Eurozone).
We expect sustainable modest growth to finally develop from the second half of 2012, supported by the reduced squeeze on consumers’ purchasing power coming from lower inflation, gradually improving global growth, and ongoing ultra accommodative monetary policy. Indeed, we believe that the Bank of England will provide further but smaller shots of Quantitative Easing in both May and August to try to boost recovery prospects. This backdrop should increasingly encourage business to invest, helped by an easing of credit conditions.
Public Finances in January
The public finances data for January (out Tuesday) are expected to show modest improvement compared to a year earlier. Specifically, we forecast there to have been a net repayment of £8.0 billion in January on the Public Sector Net Borrowing Requirement (PSNBR) excluding financial interventions compared to a net repayment of £5.2 billion in January 2011. January normally sees a net repayment on the public finances as it is a key month for tax receipts.
A modest year-on-year improvement in the public finances is expected in January as a result of the fiscal measures that have increasingly kicked in over the past year. In particular, spending cuts should now be having an impact on the public finance figures. However, softening economic activity is likely to have limited the improvement, while tax revenues were already being lifted in January 2011 by the VAT rate being increased from 17.5% to 20.0%.
Overall, the PSNBR excluding financial interventions amounted to £103.3 billion in the first nine months of fiscal year 2011/12, which was down from £114.6 billion in the corresponding period in 2010/11. If the overall performance of the first nine months was replicated through the rest of the fiscal year, the PSNBR would come in at £123 billion in 2011/12, which is below the latest government forecast of £127 billion (it was lifted from £122 billion in November’s Autumn statement).
However, it seems inevitable that the public finances will be increasingly pressurized over the coming months by muted economic activity eating into tax revenues and pushing up unemployment benefit claims. There will be a lagged impact of the economy’s loss of momentum in the final months of 2011 and it is likely not yet being fully reflected in the public finance figures.
Furthermore, despite some recent signs of improvement, we expect the economy to be essentially only flat over the first half of 2012 before a sustainable gradual improvement in growth gets underway in the second half of the year. As a result, we forecast GDP growth to be limited to just 0.5% overall in 2012. This is modestly less than the Office for Budget Responsibility’s forecast of 0.7% growth (we are also more pessimistic over GDP growth in 2013 at 1.6% compared to the OBR’s 2.3%)
So while we believe that Chancellor George Osborne is likely to achieve his PSNBR target of £127 billion in fiscal 2011/12 – and could even marginally better it– we suspect that the Chancellor faces a tough battle to get it down to £120 billion as planned in 2012/13.
So there is a very real danger that the Chancellor will before long face the difficult decision of accepting further slippage in his fiscal targets or imposing more fiscal tightening on a struggling economy. Moody’s decision to put the UK’s AAA rating on negative outlook on 13 February highlights the potential problems facing Osborne.
Minutes of February Bank of England MPC Meeting
Wednesday sees the release of the minutes of the February meeting of the Bank of England's Monetary Policy Committee (MPC), when the decision was taken to enact a further £50 billion of Quantitative Easing (QE), taking the stock up to £325 billion. It was also decided to keep interest rates down at the record-low level of 0.50%, where they have stood since March 2009.
Of crucial interest from the minutes will be whether or not all nine MPC members were in favour of the £50 billion extension to QE. If there were any MPC members against extending the QE programme in February, it will fuel speculation that this could be the last stimulus for the economy from the Bank of England barring another marked downturn in the economy. Conversely, if all nine MPC members were in favour of more QE at their February meeting, it is likely to be taken as a sign that the Bank of England is not yet done on the QE front – and this will be even more the case if any MPC member or members wanted more than the £50 billion extra QE that was approved.
There were compelling reasons for the Bank of England to provide further support to the economy through an additional £50 billion of QE in February. Last October’s £75 billion extension to the QE has now been spent. Meanwhile, despite overall signs that activity picked up in January after GDP contracted 0.2% in the fourth quarter of 2011, the economy is far from out of the economic woods and it continues to face major obstacles to developing sustainable, decent growth. This was acknowledged by the Bank of England in their statement, which accompanied the QE extension. This highlighted tight credit conditions, the fiscal squeeze and ongoing concerns about some Eurozone countries. However, it may well be that January’s overall improved news on the economy led the MPC to decide on £50 billion of Quantitative Easing rather than £75 billion as was favoured in October.
Meanwhile, markedly retreating consumer price inflation, ongoing muted wage growth and evidence that people’s inflation expectations are waning gave the Bank of England increased scope to provide further help to the economy.
We believe that additional QE is more likely than not. The Bank of England’s Quarterly Inflation Report appeared to us to contain a modest bias towards further monetary policy easing and we anticipate that economic developments will warrant further limited stimulative action. We suspect that the economy will essentially flat-line over the first half of 2012 despite recent signs of improvement and then only pick up gradually in the second half.
However, we now lean towards the view that the Bank of England will do £25 billion more QE in May and another £25 billion in August, rather than £50 billion in May. This would take the stock of QE up to GBP375 billion. We suspect that this will prove to be the ceiling for QE. Meanwhile, we are sticking to our view that interest rates will not rise until at least late-2013 and could very well stay put at 0.50% until 2014.
CBI Industrial Trends Survey for February
We expect the Confederation of British Industry (CBI) industrial trends survey for February (out Thursday) to indicate that manufacturing activity is picking up modestly after suffering a pretty torrid second half of 2011 but is still far from racing ahead.
Any further improvement in the CBI’s industrial trends survey would lift hopes that an apparent overall pick up in UK economic activity around the turn of the year extended into February. Specifically, we forecast the balance of manufacturers reporting that their orders are at normal levels to have improved to -13% in February after rebounding to -16% in January from a 14-month low of -23% in December. The balance had previously deteriorated to December’s low from +1% in August. This would compare to a long-term average of -18% for the balance.
We also expect the February CBI survey to reveal that a small positive balance of manufacturers expect to raise their production prospects over the next three months. Latest hard data show that manufacturing output spiked up by 1.0% month-on-month in December after falling through the previous six months, while January survey evidence from the purchasing managers showed improvement in addition to the CBI’s survey.
The manufacturing sector still faces a very challenging environment, so serious question marks remain as to whether the sector can sustain its improved performance around the turn of the year. Domestic demand for manufactured goods currently still faces limitations stemming from consumers’ squeezed purchasing power, reduced public spending and recently higher stock levels. Meanwhile, muted global economic activity – particularly in the Eurozone– remains a threat to manufacturers’ export orders, while the Eurozone crisis continues to cause major uncertainty for manufacturers. The purchasing managers’ survey indicated that export orders were helped in January by improved demand from Brazil, China, the Middle East, and the United States.
21 Feb - Public Sector Net Borrowing Requirement, January (GBP/Bln): -8.0 (i.e a net repayment)
22 Feb - Bank of England Monetary Policy Committee interest rate vote split, February (Hike-Unchanged-Cut): 0-9-0
22 Feb - Bank of England Monetary Policy Committee Quantitative Easing vote split, February (More-Unchanged-Reduced): 9-0-0
23 Feb - CBI Industrial Trends, Total Orders, February: -13%
24 Feb - GDP, Fourth Quarter 2011 (Quarter-on-Quarter): -0.2%
24 Feb - GDP, Fourth Quarter 2011 (Year-on-Year): +0.5%
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