The preliminary release of third-quarter GDP data is eagerly anticipated to see if the U.K. economy managed to eke out modest growth. Attention will also focus on the minutes of the October meeting of the Bank of England's Monetary Policy Committee for any insights as to whether quantitative easing is likely to be extended.
The most eagerly awaited piece of economic data will be the last to be released next week. Much attention will be focused on Friday's release of the preliminary national accounts data for the third quarter. There is a lot of uncertainty as to whether or not the U.K. economy managed to stabilize in the third quarter or even eke out modest growth after five quarters of overall deep contraction.
We expect GDP to have edged up by 0.1–0.2% quarter-on-quarter (q/q) in the third quarter after the rate of contraction moderated to 0.6% q/q in the second quarter, from 2.5% q/q in the first quarter. This would cause the year-on-year (y/y) decline in GDP to narrow to 4.7% in the third quarter from 5.5% in the second. We had originally hoped for growth of 0.3% q/q in the third quarter, but revised this down following news that industrial production plunged by 2.5% month-on-month (m/m) in August as a number of factories shut for a summer break. Even on the assumption that there is a significant bounce in industrial production in September (which is by no means certain) and there is possibly some upward revision to the August data, it now looks highly likely that the sector contracted in the third quarter.
Hopefully, this will be countered by a return to growth in services output, which accounts for 76% of U.K. output compared with the industrial sector's share of 17%. Encouragingly, the purchasing managers' survey for the services sector indicated that the sector expanded at the fastest rate for two years in September and for the fifth month in a row. In addition, the Bank of England's regional agents reported in their September survey that "demand for consumer services had increased in recent months, leaving the level of activity broadly unchanged from a year earlier."
On the expenditure side, the indications are that consumer spending may well have improved in the third quarter, with retail sales seeing reasonable growth, spending on cars up appreciably (lifted by the scrappage scheme) and some firming in spending on consumer services. Net trade looks like it will have been modestly positive in the third quarter while government spending and investment probably also supported economic activity. Nevertheless, business investment is likely to have fallen sharply again, while a big unknown is how much further stocks were run down in the third quarter.
U.K. economic activity is currently benefiting from the monetary and fiscal stimulus that has been enacted increasingly feeding through, with the car scrappage scheme particularly likely to help the economy in the near term. Also helping matters is lower inventory reduction (following the very sharp running down of stocks in the first quarter and the fourth quarter of 2008). In addition, there are signs that exports are now starting to benefit more from the competitive pound and slowing contraction or even a return to growth in key overseas markets.
Reflecting hopes that the service sector is starting to expand again, we forecast the index of services (Friday) to show that output expanded by 0.1% in the three months to August compared with the three months to May).
Following the shock 2.5% m/m plunge in industrial production in August, it is to be hoped that the Confederation of British Industry (CBI) industrial trends survey for October (Wednesday) offers some reassurance that the manufacturing sector is not suffering a renewed downward lurch and that the large drop really was primarily due to a significant number of firms deciding it was most economical to completely shut down for a holiday period over the summer and allow stock levels to be depleted further.
While question marks remain over the longer-term outlook for manufacturing, it had been believed that the sector was benefiting currently from sharply reduced stock levels, as well as from the weak pound making U.K. manufacturers more competitive in their domestic markets as well as through helping exporters. On top of this, demand has been showing signs of picking up at least temporarily in important overseas markets as well as at home. We expect the survey to reveal that the balance of manufacturers reporting that their orders are at normal levels climbed to -46% in October, from -48% in September and a 17-year low of -58% in March. It will be interesting to see if there was a rise or relapse in the balance of companies expecting output to rise over the next three months. This rose to a 15-month high of -2% in September from -5% in August and a 28-year low of -48% in March.
Also out on Wednesday are the minutes of the October meeting of the Bank of England's Monetary Policy Committee (MPC). As had been widely expected, the MPC left interest rates unchanged at a record low of 0.50% at the meeting and kept the quantitative easing program at £175 billion. The minutes are highly likely to indicate that all nine MPC members were reluctant to make any policy adjustments ahead of the Bank of England's new GDP and inflation forecasts, which they will have available at their November meeting. Furthermore, the MPC probably felt there was little need to act this month given that the current quantitative easing program will last through to the start of November, most of the latest data and survey evidence point to a limited pickup in economic activity, and latest Bank of England survey evidence suggests that banks will increase their lending in the fourth quarter. The November MPC meeting could well prove to be a spiky affair, however, and it could prove touch and go whether quantitative easing is increased by £25 billion to £200 billion.
The British Bankers' Association (BBA) is expected to report on Friday that mortgage approvals for house purchases were broadly stable at 39,000 in September. While this would be the highest level since February 2008 and more than double the November 2008 record low of 18,330, it would be little changed from 38,095 in August and 38,186 in July. Furthermore, it would still be substantially below the average monthly level of 60,741 seen since 1997. While housing market activity has been lifted by the still-significant fall in house prices from their 2007 peak levels and low mortgage interest rates, the upside continues to be limited by unfavorable economic fundamentals (notably high and rising unemployment, low earnings growth) and tight credit conditions. We suspect that still relatively low housing market activity means that the firming in housing prices seen since March/April will fizzle out—particularly if more properties come on to the market.
Retail sales (Thursday) are forecasted to have picked up appreciably in September after volumes were only flat m/m in August. Specifically, we are looking for an increase of 0.5% m/m in September, which would push the y/y increase up to 2.8%, from 2.1% in August.
Low mortgage payments, reduced utility bills, and easing inflation are boosting the purchasing power of a good many people, thereby giving them scope to step up their discretionary spending. Even so, the suspicion remains that the upside for consumer spending will be limited for some time to come as consumers still face serious obstacles. These notably include substantially higher and rising unemployment, low earnings growth, and heightened debt levels. Furthermore, many consumers are keen to limit their expenditure because of still-serious concerns about the economy and their jobs, as well as a need/desire to improve their personal finances. This was reflected in the household savings ratio jumping to 5.6% in the second quarter from 3.9% in the first. Significantly, the Bank of England has identified the need for consumers to improve their balance sheets as a major factor that could hold back economic recovery. Furthermore, value-added tax (VAT) will rise from 15.0% to 17.5% again in January—although this could well lift retail sales at the end of this year as consumers look to beat the VAT hike. Sales of big-ticket items seem particularly likely to rise ahead of January's VAT hike.
The public finances data for September (Tuesday) will undoubtedly make for their now-normal dismal reading. Tax revenues continue to be diluted by extendedly extremely weak economic activity, deteriorating corporate profitability, elevated and still-rising unemployment, markedly reduced bonus payments, last December's VAT cut, and muted housing market activity. Meanwhile, markedly higher unemployment is also resulting in increased benefit claims, thereby pushing up government expenditure. Consequently, we expect the Public Sector Net Borrowing Requirement (PSNBR) to have jumped to £15.0 billion in September from £9.0 billion in September 2008.
20 Oct - Public Sector Net Borrowing Requirement, September (GBP/Bln): 15.0
21 Oct - Bank of England Monetary Policy Committee interest-rate vote split, October (Hike-Unchanged-Cut): 0-9-0
21Oct - Bank of England Monetary Policy Committee quantitative easing vote split, October (More-Unchanged-Reduced): 0-9-0
21 Oct - CBI Industrial Trends, Total Orders, October: -46%
22 Oct - Retail Sales, September (month-on-month): +0.5%
22 Oct - Retail Sales, September (year-on-year): +2.8%
23 Oct - Index of Services, August (3-month/3-month): +0.1%
23 Oct - GDP, Third-Quarter 2009 (Quarter-on-Quarter): +0.1%
23 Oct - GDP, Third-Quarter 2009 (Year-on-Year): -4.7%
23 Oct - BBA Loans for House Purchases, September (000s): 39