UK to hit pre-recession highs in the second quarter, street party anyone?

Week commencing Monday 10th March 2014

This week in Short

  • We have a quiet week ahead in the UK with the inflation report and manufacturing production headlining. We are looking for the BoE to concentrate on growth during the inflation report and look forward to any potential upgrading of growth forecasts. Manufacturing production is likely to remain flat on the month.

  • In the US we expect retail sales to push back out of contraction with forecast pointing to an expansion of 0.2 percent. The UoM is also likely to expand to 81.9 from last month’s print of 81.2.

  • We have no news of note from Europe and are therefore continuing to concentrate on geopolitical risks associated with the troubles in Ukraine.

Overriding Market Themes

The UK economy should exceed its pre-recession growth peak in the next few months, according to a report published by the British Chambers of Commerce on Monday, where it upgraded its forecasts for this year and next. The group raised its forecasts for UK GDP to 2.8 percent in 2014 and 2.5 percent in 2015, a 1 percentage point increase from its December forecasts. The UK has had a rougher time than most, as unlike most developed economies in Europe and North America, the UK economy at the end of last year remained 1.4 percent smaller than its pre-recession peak in early 2008! It seems that good news keeps on rolling in for the UK economy of late; however it is worth noting that Britain’s economy recovery has been led (so far) by consumers and the housing market, prompting the Bank of England to warn that business investment and exports also need to pick up if the recovery is to be sustained.

Over in the Far East, Japan's economic growth in the last quarter of 2013 was weaker than previously thought; revised data shows, underscoring concerns about the pace of recovery. Fresh figures should give Bank of Japan policymakers something to worry about as they start their monthly two-day meeting, increasing speculation that the group may introduce further monetary easing measures to counter a slowdown from a tax rise next month. The world's third biggest economy expanded 0.2 percent in the quarter to December and 1.5 percent through 2013. Still, these figures are considered phenomenal Japanese growth levels after the country was dogged by decades of stagnation. These growth figures come after a blitz program initiated by Prime Minister Shinzo Abe, dubbed Abenomics, rippled through the economy. Since the neo-conservative swept national elections in late 2012, the yen lost about a quarter of its value against the dollar, considerably boosting Japanese exporters' profitability.

In the US, the economy added 175,000 new jobs in February; however the unemployment rate rose slightly to 6.7 percent. Figures published from the US labor Department were considerably better than what many had been expecting and marked a rebound from two previously weak months. The unemployment rate however, based on a different statistic, slightly rose from January’s 6.6 percent to 6.7 percent. A large chunk of the gains seen in new job creation was in the financial and the service sector at large, which was responsible for an extra 15,000 jobs. Construction companies also, despite the terrible weather that has affected much of the country, also added 15,000 jobs. It was not all a rosy picture however, with the information sector lost 16,000 jobs, most of them in film and sound recording. Unemployment however is calculated using a survey of households and saw the total number of unemployed slightly above 10.5 million. Interestingly within this statistic however is the number of long-term unemployed (defined as those jobless for 27 weeks or more) increased by 203,000 in February to more than 3.8 million. The stronger than expected job creation figures however should allow the Federal Reserve to continue to taper its asset purchasing program, which currently stands at USD 65 bn per month. We now project a further USD 10 bn taper at the next meeting.

Finally over in Europe, it seems Mario Draghi has had a slight reprieve as the bank kept interest rates unchanged amid stronger inflation and economic output figures. A month after saying that he needed more information on the economy before deciding whether to act against the threat of deflation; Draghi basked in the upgraded GDP figures for the 18 member bloc. It was not all good news however, with the CEB citing increased geopolitical risks to the zone on the back of the heightened tensions around the Ukraine and Russia, specifically the zones reliance on Russian gas supplies. Nevertheless, the bank slightly raised its projection for Eurozone growth in 2014 from 1.1% to 1.2%. The bank also expects a gradual increase in growth to 1.5% in 2015 and 1.8% in 2016. He reiterated that any repercussions on Eurozone growth from the Ukraine crisis were likely to be mild in the near term future, but could become extremely serious in a year and a half.

GBP This Week

We have a quiet week ahead for the UK after an eventful start to the month which saw a very mixed picture from the PMI’s. With very few market drivers to be watching out for this week, we are concentrating on the inflation report hearing on Tuesday. Despite the title, the event hosted by the Bank of England and MPC members should be an interesting watch, especially is they revise up their growth forecasts in particular. We also have manufacturing production due to be released on Tuesday; however the indicator is expected to remain flat at 0.3 percent on the month.

USD This Week

We have a busier week in the US with retail sales and the University of Michigan headlining the economic calendar. We start with the retail sales figure which is due to be released on Thursday, where the markets are expecting to see the figure move back into expansion with a print of 0.2 percent following a contraction of -0.4 percent in January. This figure does tend to be quite volatile and is especially open to elements such as weather and seasonal trends, the contributor to last month’s dismal posting. That said, we doubt that we will see significant volatility on the back of this release unless it is posted considerably stronger or weaker than this forecast.

Later in the week the University of Michigan consumer sentiment figure is released, providing a more qualitative assessment of the retail sector after the retail sales figure. Retail spending remains the main driver of growth in the US economy and therefore this releases importance cannot be understated. We project a rise in this indicator to 81.9 from last month’s 81.2.

EUR This Week

We have no economic releases of note from the Eurozone this week with traders continuing to concentrate on the geopolitical tensions in the Ukraine. From an economic standpoint this is unlikely to cause any significant impact on currency markets unless the situation escalates into armed conflict; however European energy companies will be in the firing line should we see continued threats from Russian gas companies to cut their supplies to Ukraine. German companies will be particularly vulnerable. 


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