We expect national accounts data released Tuesday to confirm that GDP contracted 0.6% quarter-on-quarter (q/q) in the fourth quarter of 2010. Year-on-year (y/y) growth is also seen unrevised at 1.5% in the fourth quarter, with overall expansion in 2010 at 1.3%. Of course, the 0.6% q/q contraction in GDP in the fourth quarter of 2010 was heavily influenced by December's severe weather. Worryingly, though, the Office for National Statistics (ONS) has indicated that activity contracted marginally in the fourth quarter, excluding the weather impact.

Although the ONS has recently reported that construction output contracted 2.3% q/q in the fourth quarter, rather than by 2.5% as currently shown in the national accounts, this in itself would not lead to an upward revision, given that the construction sector only accounts for 6.3% of GDP. And there is little reason to expect major revisions to the current data showing that the services sector contracted 0.7% q/q while industrial output rose 0.7%.

Similarly, there is little reason to expect major revisions to the expenditure components of GDP in the fourth quarter of 2010. This currently shows that the only positive growth came from government spending, while stocks were flat. Consumer spending contracted marginally, business investment suffered a significant relapse and net trade was negative as imports rose more than exports.

We currently expect GDP to rebound 0.7% q/q in the first quarter of 2011 as some of the activity lost to December's severe weather is made up—although recent weak consumer spending data suggest there are appreciable downside risks to this forecast. We have recently trimmed our growth forecast for the first quarter to 0.7% from 0.8% because of the weak news on the consumer front. Furthermore, just as the fourth-quarter 2010 contraction overstated the economy's weakness, so is the first quarter of 2011 likely to overstate its strength.

In fact, we expect growth to moderate appreciably after the likely first-quarter reboundas the fiscal squeeze increasingly kicks in and consumers limit their spending in the face of serious headwinds (notably including squeezed purchasing power due to high inflation and muted wage growth, high unemployment, the increasing fiscal squeeze, elevated debt levels, tight credit conditions, and a weak housing market). Specifically, we project GDP growth to moderate to 0.3–0.4% q/q through the second–fourth quarters of 2011.

This would result in overall GDP growth of 1.5% in 2011, which is a downward revision from our previous forecast of 1.6% and below the 1.7% rate projected by the Office for Budget Responsibility in the recent budget. This suggests that the chancellor could well struggle to meet his target of trimming the Public Sector Net Borrowing Requirement to GBP122 billion in 2011/12, even though this was revised up from GBP117 billion in the budget.

Mortgage Approvals in February and House Prices in March

The Bank of England is expected to report on Tuesday that mortgage approvals for house purchases edged up to 46,500 in February, from 45,723 in January and a 21-month low of 42,719 in December. Even so, this would still be extremely low compared with past norms and at a level associated with falling house prices. Mortgage approvals have actually averaged around 90,000 a month since 1993, while a level of 70,000–80,000 has in the past been considered consistent with stable house prices.

The Bank of England is also forecasted to report that net mortgage lending amounted to just GBP1.5 billion in February after a rise of GBP1.8 billion in January. This is expected to be the consequence of both recent low mortgage activity and a desire of a significant number of homeowners to reduce their debt by paying off more of their mortgages.

Meanwhile, the Nationwide lender is expected to report that house prices fell 0.2% month-on-month (m/m) in March, after edging up 0.3% m/m in February. In fact, February marked only the second month (with December) that house prices have risen on the Nationwide measure since May 2010. The year-on-year drop in house prices is seen widening to 0.8% in March from 0.1% in February.

We maintain the view that house prices will fall by around 5% overall in 2011 and end up losing around 10% from the peak levels seen in the first half of 2010. We believe housing market activity and house prices will remain under pressure for some time to come from high and likely-to-rise unemployment, negative real income growth, the increasing fiscal squeeze, very low consumer confidence, and ongoing difficulties in getting a mortgage (particularly for first-time buyers). Further bad news for the housing market is the now-strong possibility that the Bank of England will start to raise interest rates within the next few months to counter above-target and rising inflation. Any early interest-rate hike would be bad news for the housing market and likely to weigh on prices—not just the rate rise itself, but also the impact on potential house buyers' psychology resulting from the fact that they would be facing rising interest rates with the prospect of more to come.

Some support to house prices could come if the number of houses coming onto the market is limited over the coming months. The modest support provided to first-time buyers in the recent budget is too small to provide major support to the housing market.

Consumer Credit in February

The Bank of England is also expected to report on Tuesday that there was a modest net repayment of GBP100 million in consumer credit in February. This would follow a net repayment of GBP333 million in January when credit card lending edged up GBP75 million while there was a net repayment of GBP407 million in other loans and advances.

A further small net repayment in consumer credit in February would indicate that consumer appetite for taking on new borrowing remains limited while there is also an ongoing desire of many consumers to reduce their debt. This is a reflection of current very low consumer confidence and is the consequence of an uncertain and somewhat-worrying longer-term outlook for the economy and jobs as the major fiscal squeeze increasingly kicks in over the coming months. Meanwhile, there remains limited availability of unsecured credit from banks.

Growing expectations that interest rates will soon start rising is a further incentive for consumers to try to limit their borrowing and improve their finances.

Current-Account Deficit in Fourth-Quarter 2010

The current-account deficit (Tuesday) is forecasted to have widened to GBP10.0 billion in the fourth quarter of 2010, from GBP9.6 billion in the third quarter and GBP5.2 billion in the second quarter. Data already released show that the UK's total trade deficit in goods and services widened to GBP13.7 billion in the fourth quarter, from GBP12.4 billion in the third quarter and GBP10.9 billion in the second quarter. We expect the net income surplus to have risen modestly after falling to GBP7.5 billion in the third quarter, from GBP9.9 billion in the second quarter. Meanwhile, the UK's shortfall in current net transfers is likely to have remained around GBP4.5 billion.

CBI Distributive Trades Survey for March

The Confederation of British Industry (CBI) distributive trades' survey for February (Thursday) is expected to be softer because of consumers reining in their spending in the face of serious headwinds, most notably including the increasing squeeze in their purchasing power coming from higher inflation and muted wage growth. Specifically, we forecast the survey to show that the balance of retailers reporting that sales were up y/yslid to a nine-month low of just +2% in March, after plunging to +6% in February from +37% in January and +56% in December.

Consumer confidence and willingness to spend are being pressurized on a number of fronts. Purchasing power is being increasingly squeezed by higher inflation (fuelled by January's value-added tax hike and soaring petrol prices) and muted earnings growth. Meanwhile, unemployment is high and could very well rise over the coming months, the fiscal squeeze will increasingly bite as the year progresses (for example, employees' national insurance contributions will rise in April), and debt levels are elevated. A weak housing market is also weighing down on consumer spending (healthy housing market activity boosts demand for carpets, fittings, and furnishings as well as major household appliances while rising house prices can have a significant wealth effect).

Furthermore, the very real likelihood that the Bank of England will raise interest rates sooner rather than later is not good news for consumer spending prospects. Even if the Bank of England only edges interest rates up, it will affect consumer psychology as people are bound to see the move as the first in a series of hikes.

Consumer Confidence in March

The GfK/NOP consumer confidence index (overnight Thursday/Friday) is forecasted to have deteriorated anew in March after essentially stabilizing in February after a large drop in January. Specifically, we expect the index to have fallen to a two-year low of -30 in March from -28 in February. This would take the index markedly further below its long-term average of -8. The index previously edged up to -28 in February, after plunging to -29 in January from -21 in December.

We expect consumer confidence to have been pressurized in March by a further jump in inflation, increased expectations of rising interest rates, and deeper pessimism over the economic outlook. We expect the "good time to make major purchases" index to have been particularly weak in March.

Manufacturing Purchasing Managers' Survey for March

The manufacturing purchasing managers' index (PMI; out Friday) survey is expected to show that the sector enjoyed ongoing robust growth in March. Specifically, we forecast the PMI to have edged up further to a new survey (19-year) high of 61.7 in March from 61.5 in both February and January. This would keep the index substantially above the 50.0 level that indicates flat manufacturing activity. The CBI has already released an upbeat industrial trends survey for March, which included total orders being at a three-year high and manufacturers' production expectations for the next three months at a 49-month high. Nevertheless, the CBI survey showed that manufacturers are increasingly looking to raise their prices in the face of surging input costs and this is likely to be replicated in the purchasing managers' survey.

Manufacturers are currently benefiting from decent orders both at home and overseas, the competitive level of the pound, and an ongoing rebuilding of stocks after they had been slashed during the recession.

The key question is will manufacturers be able to sustain this performance as 2011 progresses while stock rebuilding wanes and tighter fiscal policy weighs down on domestic demand? While global economic activity currently looks decent, there is the risk that problems in the Eurozone could escalate and dampen foreign orders. Events in Japan and Libya could also weigh down on global growth. Meanwhile, high oil prices and surging input costs are a serious threat to manufacturing activity, by substantially squeezing companies' margins and putting pressure on them to raise prices and risk losing business.