The thorny question of judging whether or not further support should be provided to the financial system will be uppermost in the minds of UK policymakers this week.
Ahead of this week’s Bank of England meeting, analysts appear divided as to whether policymakers should plough ahead with quantitative easing or wait to assess the effectiveness of this strategy.
Evidence of how well QE has worked has been inconclusive so far, with only limited improvement in credit flows, particularly to small and medium-sized businesses.
This week’s data releases are likely to suggest that any signs of economic recovery remain fragile and are far from promising a sustained upturn.
The UK’s manufacturing sector should benefit from weaker sterling and improving demand in export markets. The purchasing managers’ manufacturing survey, due out on Monday, should show a small rise from 47 in June to 47.5, indicating that activity continued to weaken in July.
The official data for June, due on Wednesday, will provide a further reminder of the depth of the recession gripping the industrial sector. The consensus forecast is for manufacturing output to dip 0.1 per cent, which would slow the year-on-year decline from -12.7 per cent in May to -12.1 per cent.
The service sector PMI survey, due on Wednesday, could provide an important test of optimism about the “green shoots” of recovery. After a small fall in the headline index to 51.6 in June, the consensus forecast is for a rise to 51.8, but further weakness might inflame fears that the UK’s recovery has stalled.
In the US, June’s personal income and expenditure data, due out on Tuesday, will highlight pressures on consumers. Incomes are expected to drop 1 per cent and weak growth in households’ finances is expected to slow any recovery in consumer spending.
July’s manufacturing survey from the Institute for Supply Management, due out on Monday, is expected to show an increase from 44.8 in June to 46.5. The non-manufacturing survey, due on Wednesday, is expected to increase from 47 in June to 48 in July, but a move above the 50 mark would be seen as an encouraging sign that a recovery is gathering strength.
Friday brings US employment data, potentially a significant test of confidence for equity market investors, with the stock market up more than 7 per cent in July. The consensus forecast is for a decline of 345,000 in non-farm payrolls following a larger-than-expected drop of 467,000 in June. This would mean that more than 6.8m US citizens have lost their jobs in the downturn and push the unemployment rate from 9.5 to 9.6 per cent.
In the eurozone, the European Central Bank is set to hold interest rates unchanged at 1 per cent on Thursday and will face questions on its programme of buying covered bonds, which started in early July as part of an effort to improve financing conditions.
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