EU finance ministers rejection of Greece's latest £3.3bn austerity package puts the spectre of Greek default firmly back in the spotlight. All eyes wil l be on the results of Sunday's Parliamentary vote, which Greek Finance Minister Venizelos is pitching as a referendum on Euro membership itself. Assuming Greece can salvage a deal, the Euro Group could sign off on this at a meeting on Wednesday allowing the Greek PSI deal to be agreed on Thursday. Though this misses the supposed 13 February ‘deadline', officials are hopeful that a deal on Thursday will allow funds to reach Greece for its 20 March deadline. The risks and stakes remain very high.
While event risk in Europe is likely to dominate, attention for the coming week will refocus on signs of a cyclical upturn. In Europe, preliminary estimates of Q4 GDP from the major states will likely reveal contraction across the piste, particularly after sharp declines in December's industrial output. However, we will watch the German ZEW survey - the first of the Euro area's February surveys - for continued signs of a rebound in Q1. We think Germany and France will avoid technical recession (nothwithstanding additional risks from snow). Meanwhile the ECB's second 3-yr LTRO on 29 February remains the next big monetary policy date.
The MPC's decision to provide an additional £50bn of QE this week came as no surprise. The accompanying statement suggested that debate about future stimulus will be finely balanced. Next week's Inflation Report looks unlikely to provide a definitive conclusion to that debate. However,we expect the medium-term projections to incorporate less downside risk, following improvements in the international outlook and the CPI central projections to be nudged higher, reflecting further QE and growing nervousness about the assumed scale of disinflation. This week's releases are likely to continue to make the case for stimulus beyond May: we see CPI inflation slowing to 3.5% in January (3.6% consensus) and retail sales volumes dropping by 0.3% (0.2% consensus). Further, while we think claimant unemployment will remain subdued for now we expect a steeper pick up in the coming months. These should not prove game changing for the monetary policy outlook. Instead, global cyclical indicators and the ECB's LTRO are likely to be more important in the short-term. But we will watch Governor King's Inflation Report press conference for clues to the balance of the MPC's current thinking. The US also posts forward-looking indicators this week. The Empire State and Philadelphia Fed surveys will give us our best outlook for cyclical momentum and we expect to see continued modest gains. Meanwhile the NFIB small business survey will give greater insight into the structural improvements we believe are underway. However, official numbers are also likely to prove encouraging. We forecast punchy gains in January's industrial output - up 0.8%, underpinned by surging manufacturing output. We also look for a strong 0.6% rise in retail sales. The FOMC's minutes will also provide interest. The Fed's latest statement was noticeably more downbeat than recent economic releases. The minutes may reveal a more hawkish/upbeat tone from some on the FOMC. President Obama's 2013 Budget could thus be released against a more optimistic economic backdrop.
The coming week also sees risks of a PBoC easing. January's weak lending and slower money supply growth have led us to watch for the first PBoC easing in H1 2012 with more urgency. We do not rule out a change in the reserve ratio regime as soon as this week. This easing theme does not just apply to China. Despite more encouraging signs, global central bank easing remains predominant for now.
Inflation Report (Q1)
Wednesday's Inflation Report will provide insight into the debate on the MPC, a debate that seems to have entered an interesting phase. The statement accompanying February's decision to extend QE suggested the MPC was weighing the early signs of a cyclical upturn in the UK against ongoing structural impediments. The Inflation Report projections will give some insight into this balance. We expect little change to the central GDP outlook, but suspect that improvement in international economies will have reduced the perceived downside risks. Views on the inflation outlook will provide a steer to the likelihood of further stimulus beyond May. At this stage these projections are unlikely to rule out further stimulus, but that will be the nub of the debate over the coming months.
CPI inflation (Jan)
CPI inflation has dropped sharply in the past three months to 4.2% in December from the peak of 5.2% in September. January's release is likely to show a further sharp decline and we pencil in a drop to 3.5%. Key to this month's drop should be the anniversary of last January's VAT rate hike, although the scale of the impact will depend on the timing of last year's pass through. Additionally, utility tariff reductions began this month and fuel prices were one of the many areas that will benefit from last year's base effects. This decline in inflation is in keeping with the short-term drop projected by the Bank of England's medium-term forecasts. We remain of the view that inflation is unlikely to fall back as quickly as the Bank expected in November. Should the Bank come around to this view, it may limit the scope for further stimulus.
Labour market (Dec/Jan)
Claimant count unemployment rose by just 4k in Q4 despite the domestic economy registering a 0.2% contraction in activity. While we suspect the claimant count lags wider changes in the pace of economic activity, this would suggest that unemployment should begin to reflect the downturn in Q4 GDP and rise more sharply over the coming months. In the three months to November, ILO unemployment rose by 118k with the rate at 8.4%. We look for unemployment in Q4 to have risen by 95k, with the rate pushing higher to 8.5% in the latest release - its highest since October 1995. Against this backdrop, we forecast headline average earnings growth slowing to 1.7% in December as weaker bonuses impact. The ex bonus measure is expected to rise from 1.9% to 2.0%.
Retail sales (Jan)
The outlook for the consumer remains challenging. While Q4 sales activity was buoyant, supported by aggressive discounting by retailers, we expect retail sales volumes to have contracted in January. December's sales were boosted by one-off factors, such as the public sector strike and the extra Saturday before Christmas, the absence of which is likely to see sales volumes fall back. We pencil in a 0.3% decline, reflecting the weakness reported by the CBI and BRC retail trade reports. It should be noted, however, that both these reports are imperfect guides to spending with the BRC's figure further complicated by the VAT rate rise anniversary. Looking ahead 2012 should prove difficult for retailers as further declines in household real incomes and renewed efforts for balance sheet repair put an ongoing squeeze on the consumer.
0 comments:
Post a Comment