Economic Outlook: Bernanke view awaited

Testimony from Ben Bernanke, Federal Reserve chairman, to both US houses of Congress form the highlights in a week otherwise lacking in top-tier updates from the world’s biggest economy.

Minutes from the Fed’s July monetary policy meeting, published last week, emphasised the central bank’s increasing concern about risks to economic recovery. The Fed trimmed its growth forecasts at that meeting, but officials stopped short of calling for additional measures to stimulate the economy, instead opting to closely scrutinise upcoming data.

After the publication of last week’s minutes, Fed officials would have been dismayed by manufacturing data on Thursday from the leading industrial centres of New York and Philadelphia, which showed unexpectedly sharp declines in activity.

“Mr Bernanke will likely focus on the testing and timing of exit strategies and the conditions under which additional stimulus would be warranted, though we expect him to say additional stimulus is not needed at this time,” said Fabio Fois of Barclays Capital.

The Fed funds rate is therefore likely to remain at exceptionally low levels for an extended period, but in neighbouring Canada investors find out on Tuesday whether interest rate markets were correct in pricing in a 90 per cent chance of a quarter-point rate increase to 0.75 per cent. Recent strong employment data increased the likelihood Canadian rates would rise by another 25 basis points following the May increase from 0.25 per cent to 0.5 per cent. However, the central bank’s decision may also be swayed by recent signs of slowing growth in the US and China – the chief destinations for its commodity exports such as oil and copper.

In the UK, markets get their first chance to react to second-quarter growth data after final revisions to first-quarter growth failed to build on previous estimates, and also showed that the recession had been deeper than previously calculated.

Forecasts from analysts put the quarter-on-quarter gross domestic product growth at between 0.5 and 0.7 per cent, up from 0.3 per cent in the first quarter, which would lift the annualised growth rate to 1.1 per cent. Some, however, believe this will be as good as it gets for a while.

“We expect growth to be relatively muted going forward as fiscal tightening increasingly starts to impact, while the eurozone’s problems and the pressure on consumers coming from high unemployment, muted wage growth and high debt levels will also squeeze,” said Howard Archer at IHS Global Insight.

UK retail sales data for June are expected to show the impact of the football World Cup, rising 0.5 per cent on the month.

German Ifo business confidence, published on Friday, is expected to show the further impact of eurozone debt concerns on Europe’s biggest economy, with the headline index falling to 100.5 in July from 101.8 in June.

Back in the US, the housing market is expected to reflect weaknesses elsewhere in the economy. Housing starts on Tuesday are expected to have declined in June to 580,000, from 593,000 in May, while existing home sales, published on Thursday, are seen falling to 5.4m in June from 5.66m in May.