The UK economy should have escaped recession by the third quarter but any relief over a return to growth will be tempered by concerns over the deteriorating state of public finances, the key themes of this week’s data releases.
The consensus forecast for third-quarter gross domestic product, due on Friday, is for growth of 0.1 per cent after a fall of 0.6 per cent in the previous three months.
However, poor manufacturing output data for August, when production unexpectedly dropped 1.9 per cent, mean there remains considerable uncertainty over whether policymakers will be able to confirm that the recession ended in the third quarter.
Since reaching a peak in the first quarter of 2008, the economy has shrunk by 5.5 per cent, with activity contracting for five consecutive quarters. This deep downturn has had a dramatic impact on the public finances with September’s data, due tomorrow, expected to show net borrowing at £15bn.
This would take cumulative net borrowing to £81bn half way through the current financial year, on track to meet Chancellor Alistair Darling’s forecast of £175bn for 2009-10.
Although the main political parties have acknowledged the need to cut government spending to restore the public finances to a sustainable level, they remain extremely reluctant to propose tax increases ahead of the general election.
Amit Kara, economist at UBS, says fears over the UK’s fiscal position have been “overplayed” but he also warns that economic recovery in itself will not fix the public finances.
“Spending cuts or tax rises, or both, will be required,” said Mr Kara, who points out that an early fiscal consolidation risks derailing any economic recovery, while a delayed response could trigger a downgrade for the UK’s credit rating, which would, in turn, push government bond yields higher.
UK retail sales, due out on Thursday, are expected to show a rise of 0.5 per cent in September, which would push the year-on-year increase from 2.1 per cent in August up to 2.8 per cent.
The cash-for-clunkers scheme has boosted spending on cars and consumers might bring forward some spending on big-ticket items ahead of the increase in VAT sales tax in January.
However, rising unemployment, muted earnings growth and the need for many households to increase savings to improve their balance sheets suggests consumer spending will remain weak into next year. UBS is forecasting a rise of 0.6 per cent in real consumer spending in 2010.
The Bank of Canada’s decision on interest rates, due tomorrow, is a key market event following Australia’s decision to raise rates earlier this month, the first central bank to tighten monetary policy following the global financial crisis. The consensus forecast is for Canadian rates to remain unchanged at 0.25 per cent but the accompanying statement might provide some indication of when the central bank could shift to a less accommodative monetary stance.
Further signs of healing in the US property market should be evident with the National Association of Homebuilders Activity index, due out today, seen rising from 19 in September to 20 in October.
Housing starts, due out tomorrow, are seen rising from 598,000 in August to 607,000 in September.
Existing home sales for September, due on Friday, are expected to increase from 5.1m (annualised) in August to 5.4m.
The Fed’s Beige Book, due out on Wednesday, which provides a regional analysis of the US economy, is likely to say that residential real estate markets have shown some signs of improvement while commercial real estate activity remains weak.
Also of interest from the Beige Book will be any comments on consumer spending after the sharp drop in car sales following the end of the cash-for-clunkers scheme.
The unexpectedly large fall in US employment in August, with non-farm payrolls dropping 263,000 in September, provided an uncomfortable reminder that the recovery would not be smooth and the Beige Book analysis of labour market conditions will be of note.
In the eurozone, the preliminary estimates for the October purchasing managers’ surveys, due on Friday, should show the manufacturing sector moving back towards expansion. The consensus forecast is for an increase to 50, the no-change mark, compared with 49.3 in September. (A reading above 50 indicates expansion compared with the previous month). The eurozone service sector PMI is seen rising from 50.9 to 51.5.
Germany's IFO business climate survey is expected to register further improvement in October’s data, also due out on Friday. The headline IFO index is seen rising from 91.3 in September to 92 while the expectations measure is forecast to strengthen from 95.7 to 96.2.
China will release third-quarter GDP data and industrial production figures for September on Thursday. The government’s stimulus programme should increase momentum across the industrial sector with year-on-year growth seen rising from 12.3 per cent in August to 13.1 per cent.
The Chinese government’s stimulus measures have boosted fixed asset investment and bolstered domestic demand. Retail sales growth in volume terms is running close to record levels, helped by strong car sales and a recovery in property markets.
China’s real GDP growth is seen rising from 7.9 per cent year-on-year in the second quarter to 9 per cent in the third quarter and the recovery is expected to be sustained in 2010.
“We believe the infrastructure-centric, investment driven recovery can be sustained into 2010, and we look for GDP growth to reach 9.5 per cent next year,” said HSBC.
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