The coming week is very heavy on the U.K. economic data and survey front. They seem certain to show that the United Kingdom entered recession with a bang in the fourth quarter of 2008 and is starting off 2009 dismally.
The preliminary national accounts datafor the fourth quarter of 2008 (out Friday) are expected to show that the economy deteriorated substantially as it officially moved into recession (defined as two consecutive quarters of negative quarter-on-quarter GDP). We forecast GDP to have contracted 1.2% quarter-on-quarter in the fourth quarter of 2008, which would be double the 0.6% decline seen in the third quarter. It would also be the equal largest quarter-on-quarter decline in GDP (with the third quarter of 1990) since 1980. As a result, GDP is expected to have contracted 1.4% year-on-year in the fourth quarter of 2008.
The preliminary national accounts data will only contain estimates for the output side of the economy, and it will undoubtedly reveal sharp contraction across the board—in service sector activity, industrial production, and construction output. Our current forecast is for UK GDP to contract 2.9% in 2009, with declines in output occurring through all four quarters. This would be the sharpest contraction since the Second World War. Furthermore, we see GDP only flat overall in 2010, as recovery develops very gradually.
Further evidence that the economy ended 2008 very much on the back foot is likely to be provided by retail sales data for December (out Friday). Although the retail sales data have been markedly firmer than the survey evidence in recent months, and retailers increasingly engaged in discounting and promotions as the month progressed, we expect retail sales volumes to have contracted 0.8% month-on-month in December as increasingly pressurized and cash-strapped consumers reined in their spending. This would limit year-on-year growth to 1.4%. Meanwhile, the increased discounting and promotions, as well as the cut in value-added tax from 17.5% to 15.0% that came into effect on December 1, should have resulted in a substantial decline in the retail sales price deflator. This retreated to 0.2% in November from 0.6% in October and a peak of 1.7% in July.
Evidence that the manufacturing sector continues to struggle hugely at the beginning of 2009 is expected to come from the Confederation of British Industry (CBI) industrial trends survey for January (out Thursday). We forecast the CBI's survey to show that the balance of manufacturers reporting that their overall orders are at normal levels retreated to -38% in January from -35 in December. This is expected to be due to sharply falling domestic and foreign orders. Production expectations could well have weakened even further after falling to a 28-year low in November and then remaining at that level in December. Meanwhile, the balance of manufacturers expecting to raise their prices over the next three months seems highly likely to move into negative territory in January, after dropping to 0% in both November and December from +10% in October and an 18-and-a-half-year high of +34% in July, thereby providing further evidence that sharply contracting activity and demand is now hammering manufacturers' pricing power
Data out on Wednesday is expected to show that the deepening recession is taking an ever-increasing toll on the labour market. Claimant count unemployment is forecast to have jumped by a further 82,000 in December, after rising 75,700 in November (which was the largest increase since March 1991). The claimant count unemployment rate is forecast to rise to 3.5% in December from 3.3% in November. The unemployment rate is seen climbing to 6.2% on the International Labour Organization (ILO) measure in the three months to November. Reports of companies laying off workers are becoming more and more prevalent, while an increasing number of companies are folding. There is a rapidly increasing risk that claimant count unemployment (1.07 million in November) will reach two million before the end of 2009. Furthermore, unemployment on the ILO measure (1.864 million in the three months to October) is poised to rise above two million imminently and it seems ever more likely to reach three million in 2010.
Meanwhile, average earnings growth is expected to have remained muted in November. We expect underlyingaverage earnings growth (excluding bonus payments) to have been limited to 3.6% in the three months to November. Headline average annual earnings growth is seen at an even lower 3.4% in the three months to November. These levels would be substantially below the 4.5% level that the Bank of England considers broadly consistent with its 2.0% consumer price inflation target. Earnings growth seems likely to be weak in 2009 given that unemployment is soaring, inflation is falling back sharply, and inflation expectations have plunged.
Recession is also taking a major toll on the public finances (out Wednesday for December) and these will also be increasingly hit over the coming months by the various government measures that have been enacted to try to boost the economy. Contracting economic activity and the extremely weak housing market is increasingly cutting tax receipts, while accelerating unemployment is pushing up benefit claims. We expect there to have been a Public Sector Net Borrowing Requirement (PSNBR) of £13.5 billion in December compared to £7.4 billion in December 2007.
Inflation data for December (out Tuesday) are likely to show that the downward trend accelerated markedly. The reduction in value-added tax from 17.5% to 15.0% that came into effect at the beginning of last month should have had a major effect in bringing inflation down, while additional significant downward pressure should have come from sharply lower oil prices and heightened discounting by retailers as they tried to get increasingly pressurized and reluctant consumers to spend. Favourable base effects will also have led to annual inflation rates falling.
Specifically, we forecast annual consumer price inflation to have plunged to 2.2% in December from 4.1% in November and September's peak of 5.2%. Core consumer price inflation is projected to have retreated to 1.5% in December from 2.0% in November. Meanwhile, annual underlying retail price inflation is expected to have fallen back sharply to 2.4% in December from 3.9% in November, while annual headline retail price inflation is seen moderating to just 0.8% in December from 3.0% in November, as it is further brought down by lower mortgage interest rates.
Completing a week of major releases, Wednesday sees the release of the minutes of the January meeting of the Bank of England's Monetary Policy Committee (MPC). TheMPC cut interest rates by a further 50 basis points from 2.00% to 1.50% at the meeting. This brought the cumulative reduction in interest rates by the Bank of England to 350 basis points since October, and took them down to the lowest level since the central bank was founded in 1694. We suspect all nine MPC members were in favour of December's 50-basis-point cut, and we expect the minutes to open the door wide to a further reduction at the February meeting.
With the United Kingdom now clearly deep in recession and inflation falling sharply, we expect the Bank of England to cut interest rates by another 50 basis points to 1.00% in February. Further out, we see interest rates coming down to a low of 0.25–0.50% in the second quarter. Indeed, it is very possible that they could come all the way down to zero. In addition, it seems likely that the Bank of England will eventually engage in some form of quantitative easing, in tandem with the Treasury.
20 Jan - Consumer Price Inflation, December (Month-on-Month): -1.2%
20 Jan - Consumer Price Inflation, December (Year-on-Year): +2.2%
20 Jan - Core Consumer Price Inflation (ex Food, Drink, Tobacco), December (Year-on-Year): +1.5%
20 Jan - Retail Price Inflation, December (Month-on-Month): -1.6%
20 Jan - Retail Price Inflation, December (Year-on-Year): +0.8%
20 Jan - Underlying Retail Price Inflation, December (Month-on-Month): -1.4%
20 Jan - Underlying Retail Price Inflation, December (Year-on-Year): +2.4%
21 Jan - Bank of England Monetary Policy Committee vote split, January (Hike-Unchanged-Cut): 0-0-9
21 Jan - Claimant Count Unemployment Rate, December (%): 3.5%
21 Jan - Claimant Count Unemployment Change, December (000s): +82K
21 Jan - International Labour Organization Unemployment Rate, November (%): 6.2%
21 Jan - Average Earnings including bonus, November (3-Month/Year): +3.4%
21 Jan - Average Earnings excluding bonus, November (3-Month/Year): +3.6%
21 Jan - Public Sector Net Borrowing Requirement, December (GBP/Bln): 13.5
22 Jan - CBI Monthly Industrial Trends Total Orders, December (balance): -38%
23 Jan - GDP, Fourth Quarter 2008 (Quarter-on-Quarter): -1.2%
23 Jan - GDP, Fourth Quarter 2008 (Year-on-Year): -1.4%
23 Jan - Retail Sales, December (month-on-month): -0.8%
23 Jan - Retail Sales, December (year-on-year): +1.4%