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19/07/2009 | GDP in Q2, Minutes of July Central Bank Policy Meeting Head U.K. Economic Releases for the Week Beginning 20 July

Howard Archer

Preliminary national accounts data are expected to show that GDP contracted at a sharply reduced rate in the second quarter. Meanwhile, the minutes of the July meeting of the Bank of England's Monetary Policy Committee could offer important insights as to whether the bank will extend its quantitative easing program.

 

Much attention will be focused on the minutes of the July meeting of the Bank of England's Monetary Policy Committee (MPC), which are released on Wednesday. While there had never been any doubt that the MPC would leave the Bank of England's key interest rate unchanged at the record low of 0.50% at the meeting, it had been widely expected that the committee would extend the central bank's quantitative easing program by a further £25 billion to £150 billion, thereby taking it up to the ceiling currently allowed by the Treasury. The MPC failed to do this, however, leading to speculation that it could be bringing that program to an end.

We doubt that this is the case and suspect that the MPC felt that it could afford to "wait and see" for another month before deciding whether to extend the quantitative easing program. Latest evidence indicates overall that the rate of economic contraction has slowed substantially, while the MPC likely wanted more time to judge if the quantitative easing that has been enacted so far is starting to increasingly filter through to support bank lending. The very brief statement following the July MPC meeting noted that the already announced program of £125 billion of quantitative easing will take another month to complete, while the MPC will have access at its August meeting to the Bank of England's new GDP and inflation forecasts (which are compiled for the August Quarterly Inflation Report). Furthermore, a number of speeches and interviews by MPC members since their last meeting have stressed that not too much should be read into the decision not to extend the program in July and that they are keeping a completely open mind as to whether the Bank of England needs to do more to stimulate the economy.

Nevertheless, it will be interesting to see if any MPC members were in favor of extending quantitative easing at the July meeting and whether they discussed, or even voted for, Bank of England Governor Mervyn King writing to Chancellor Alistair Darling for permission to raise the current £150-billion ceiling for quantitative easing. The minutes could also give a crucial insight as to whether the MPC is becoming any more optimistic about medium-term recovery prospects.

Another key release is the preliminary national accounts data for the second quarter (Friday). We suspect hopes that the economy managed to return to growth in the second quarter will be unrealized, but we do believe that the data will show that the economy contracted at its slowest rate since the second quarter of 2008. Specifically, we estimate that GDP contraction slowed substantially to 0.3% quarter-on-quarter (q/q) in the second quarter from 2.4% q/q in the first quarter. Nevertheless, this would mark the fifth successive quarter of contraction as GDP also declined by 1.8% q/q in the fourth quarter of 2008, 0.7% in the third, and 0.1% in the second. Meanwhile, we expect the year-on-year decline in GDP to have widened to 5.2% in the second quarter of 2009, from 4.9% in the first. Only estimates of the output side of the economy in the second quarter will be released on Friday. We expect this to reveal that the rate of decline slowed appreciably in the services, manufacturing, and services sectors.

Latest data and survey evidence indicate overall that the manufacturing sector is currently benefiting appreciably from the major destocking that has occurred and, to a lesser extent, the boost to competitiveness stemming from the overall marked depreciation of the pound. We expect this to be reflected in an improved Confederation of British Industry's industrial trends survey for July (Wednesday). Specifically, we forecast the survey to reveal that the balance of manufacturers reporting that their overall orders were at normal levels climbed to -46% in July, from -51% in June and a 17-year low of -58% in March. This is likely to be helped by an improvement in the export orders sub-index. In addition, the balance of companies expecting output to rise over the next three months may well have risen further after improving to -17% in both June and May from -32% in April and a 28-year low of -48% in March. Nevertheless, the survey still seems likely to show that a clear balance of manufacturers are expecting to trim their prices over the next three months to try to boost their sales.

Indeed, while leaner stocks and a more competitive pound have improved their position, manufacturers are still battling against muted domestic demand, difficult conditions in overseas markets, and intensified competition. Furthermore, manufacturers will be hoping that sterling does not strengthen further, having moved up significantly from its lows seen around the turn of the year.

Retail sales (Thursday) are forecasted to have picked up in June, after suffering a poor May, as the hot weather boosted demand for summer clothes, footwear, outdoor leisure goods, and food. In addition, survey evidence from the British Retail Consortium suggests that a number of shops engaged in earlier and deeper summer discounting to try to lift sales. On the positive side, sharply reduced mortgage payments and moderating inflation are boosting many people's purchasing power. Nevertheless, consumers remain under serious pressure from sharply higher and rising unemployment, markedly reduced earnings growth, and heightened debt levels. Meanwhile, credit conditions are still tight and many consumers are keen to retrench because of serious concerns about the economy and jobs, as well as a desire to improve their balance sheets.

The public finances for June (Monday) will undoubtedly make for their now normal dismal reading. Tax revenues are being decimated by extended, extremely weak economic activity, deteriorating corporate profitability, sharply higher and rising unemployment, markedly reduced bonus payments, last December's value-added tax cut, and muted housing market activity and prices. Meanwhile, sharply higher unemployment is also resulting in higher benefit claims, thereby pushing up government expenditure. Consequently, we expect the Public Sector Net Borrowing Requirement (PSNBR) to have soared to £16.0 billion in June, from £7.5 billion in June 2008.

 

21 Jul - Public Sector Net Borrowing Requirement, June (GBP/Bln): 16.0
22 Jul - Bank of England Monetary Policy Committee vote split, July (Hike-Unchanged-Cut): 0-9-0
22 Jul - CBI Industrial Trends, Total Orders, July: -46%
23 Jul - Retail Sales, June (month-on-month): +0.5%
23 Jul - Retail Sales, June (year-on-year): +2.4%
24 Jul - GDP, Second-Quarter 2009 (quarter-on-quarter): -0.3%
24 Jul - GDP, Second-Quarter 2009 (year-on-year): -5.2%

Global Insight (Reino Unido)

 


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