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FX Street: Economics Weekly

The Russian economy grew by 4.8% y/y in Q4

LAST WEEK China’s official manufacturing PMI index unexpectedly rose in January to 50.5 from 50.3 in December. Although the index remains only slightly above the 50 expansion level, there are some positive signs that the underlying momentum in the manufacturing sector will remain firm in the coming months, supporting our forecast of a moderate slowdown in Q1 GDP growth. In particular, output rose to 53.6 from 53.4 in December - its highest level since April 2011. New orders were also back

Monthly data suggest that Russian activity remained solid in Q4

LAST WEEK The Bank of Israel cut its benchmark interest rate by 25bp to 2.5%, the third such move since August 2011. With inflation running comfortably within the 1-3% target we believe there is room for additional cuts this year. While market expectations for a rate cut by the Israeli authorities were divided, the decision by the Hungarian central bank to keep rates on hold at 7% took markets by surprise, but it was in line with our call. Although recent market behaviour suggests that any

The Chinese economy grew by 2.0% q/q in Q4

LAST WEEK The Chinese economy grew by 2.0% q/q in Q4, albeit from 2.3% in Q3 with the annual growth rate declining to 8.9% from 9.1% in Q3. This brings GDP growth for 2011 as whole to 9.2% bang in line with our forecast. Monthly data suggest the economy ended 2011 on a positive note, with industrial production increasing 12.8% y/y in December from 12.4% in the previous month. However, the pick-up in activity is likely to be related to the earlier than normal Chinese New Year. This is also

China's trade surplus posted a surprise increase in December,

LAST WEEK China’s trade surplus posted a surprise increase in December, rising to US$16.52bn from US$14.53bn in November, driven by a sharp fall in imports. However, the volume data doesn’t suggest a dramatic slump in import demand, as growth actually picked up for some key commodities. Falling commodities prices were the principal driver behind the decline in nominal import growth. This was confirmed by December’s producer price inflation. PPI fell to 1.7%y/y – the lowest in two years. The

Brazilian industrial production rose 0.3% m/m in November

LAST WEEK China’s official manufacturing PMI rose to 50.3 in December after falling below 50 - the level dividing expansion and contraction - for the first time in 33 months in November. Strong demand and activity ahead of Chinese New Year contributed to the increase but export orders also improved. Looking ahead the timing of the annual festivities are likely to see production and the PMI both soften in January. However, overall we still look for only a moderate slowdown in GDP growth in H1

China and Poland also have room to loosen monetary policy

THE WEEK AHEAD Key emerging market data are few in the coming week (please see overleaf). This provides an opportunity to discuss a key theme for 2012. Weaker euro growth will impact on all emerging market economies (emergers). However, some are more vulnerable than others due to their respective trade and financial linkages with the region and differing ability to stimulate domestic demand. Below we look at which countries have the tools to do so, focusing on the top 10 emergers plus Hungary

China's trade surplus narrowed to $14.5bn

LAST WEEK Indian wholesale price inflation slowed to 9.1% y/y in November from 9.7% in October. But while food price inflation has slowed markedly, fuel and manufacturing prices (nearly 80% of the basket) remain elevated. Moreover, the sharp depreciation in the rupee will add to inflationary pressures (USD/INR has been trading at record highs of +53). However, given the balance between growth and inflation the RBI kept its repo interest rate unchanged at 8.5%. Moreover, we believe that

Decision time for Ireland

Financial markets remain pre-occupied with developments in the euro-zone, where negotiations have been ongoing between the Irish government, European Commission, ECB and IMF on new measures to support the Irish banks. While it is not a foregone conclusion that Ireland will choose to make use of this facility, recent movements in Irish government bonds suggest that markets anticipate such an outcome. Ireland’s 10-year bond yield spread over German bunds has narrowed from 580bp early last week.

US inflation to hit lowest since first man in space

It is a busy week in the UK with a number of important releases to keep the market’s attention. The Bank of England is set to publish the minutes of November’s MPC meeting where we look for another split in the vote, highlighting the differing opinions among policy makers. The minutes follow the November Inflation Report published last week, which means that they will be scrutinised not so much for what they say about the Committee’s central view, but rather any insight they provide on the

Are Irish eyes really smiling?

Ireland may only account for 1-2% of euro-zone GDP, but it is punching above its weight at the moment. The Irish government has front-loaded its 4-year €15bn tightening programme to incorporate a €6bn adjustment next year alone, with the aim of lowering the deficit to around 9.25% of GDP versus an expected €12bn or so this year (excluding bank bail-out costs). But as yet, financial markets seem unconvinced. The 10-year Irish yield spread over German bunds remains high at well over 500bp, while

Markets poised for action from the Fed...

The week will be dominated by the Mid-term elections and the FOMC meeting on Wednesday. Markets are expecting the Fed to announce upwards of $750bn of additional QE. Failure to do so will lead to unfavourable market shifts. Additionally, QE may not do a huge amount to help the economy in our view; as savers want to save and interest rates are already at rock bottom. But it should help to improve sentiment in the markets and keep down long term rates. Watch out for any changes in the Fed’s

Markets to focus on US housing and Q3 GDP data...

The UK data calendar is not particularly busy this week, but what it lacks in quantity it more than makes up for in terms of the importance. The key number is the first release of Q3 GDP. While the headline figure is likely to be fairly decent, we expect it will raise more questions than it answers. Following a 1.2% q-o-q rise in Q2, we look for GDP growth to expand by 0.5% in Q3, with risks skewed to the upside. This will partly depend on what happens to growth in the construction sector (6%

UK Economic Update: Downside risks argue for further stimulus

In this week’s commentary, we summarize our latest UK economic forecasts, outlined in more detail in our recently published Q4 UK Economic Bulletin. A fragile recovery While we expect a recovery of sorts to continue, the challenges to growth remain formidable. Forthcoming public spending cuts - to be unveiled in more detail in Wednesday’s Spending Review - declining household disposable incomes and ongoing deleveraging will likely act as a major constraint on domestic demand growth next year.

FOMC minutes to whet markets' appetite for further QE in the US...

The UK monetary policy debate is particularly interesting at present. We expect the vote from the recent October MPC meeting to have been a three-way split, with Andrew Sentance and Adam Posen (and perhaps one or two others) taking opposing sides in the debate, with the remainder of the MPC still in ‘wait-and-see’ mode. Over the past few days, data may have nudged this latter ‘camp’ towards further asset purchases. In terms of key numbers before next month’s MPC meeting, we look for September

High unemployment - a symptom of the debt crisis

Unemployment remains high in all of the advanced economies and in some is still rising. Almost a year into the economic recovery, unemployment in the eurozone rose to 10.1% in July 2010. It seems that recovery from the recent recession has not had the expected impact on unemployment levels. Still, it is well known that unemployment lags the economic cycle. So are the trends we are seeing in unemployment that different from previous recessions? We explore that issue in this Weekly. Even a brief

Will QE become QE2?

Signs of a weakening in the UK economy are becoming more widespread. Since GDP growth of 1.2% in Q2, UK purchasing managers’ indices have turned lower, volume retail sales has shown the first fall in four months and business and consumer confidence is turning down. With interest rates pretty much as low as they can go at 0.5%, the only real monetary option left is quantitative easing – directly injecting liquidity into the economy via the central bank buying securities from the financial

Ship ahoy! Markets eye QE2 on both sides of the Atlantic...

In the UK, the focus will be September’s Bank of England MPC minutes. In terms of the vote, we expect to see a repeat of the last three outcomes with Andrew Sentance advocating a 25bp hike in Bank Rate, but finding no support from other Committee members. Indeed, given the marked deterioration in recent UK data there is a small chance that Sentance might have backed off this month. The minutes will also be scrutinised for any sign that the MPC may have moved closer to implementing further QE

UK faces autumn chill

The approach of autumn has brought with it a slight chill in the air. Having posted a strong performance in the second quarter, recent coincident and leading indicators suggest that the UK economy could be headed for a pronounced slowdown in the second half. In this week’s commentary, we review some of the recent indicators and assess their implications for the UK economy over the coming months. Most notably, the monthly purchasing managers’ indices published by Markit for the services,

Why are corporate default rates so low in the UK?

Corporate default rates in the UK are exceptionally low for this stage of the economic cycle. The severity of the recent economic shock should have resulted in a rise in defaults bigger than experienced in the last 50 years of economic downturns - or at least on par with some of the worst. They have risen, but nothing like the fall in economic growth suggests they should have. In this Weekly, we present a few reasons why this might have been the case and ask whether low default rates will or

US payrolls to test market nerves - again

After a recent lull, this week’s UK calendar mainly features ‘second tier’ economic data. Highlights include bank lending figures and the Nationwide’s house price index, as well as the various PMI surveys. Mortgage and consumer credit data have been fairly static over the past three months and there is little to suggest a change in July, as consumers remain cautious and keep borrowing levels down. This partly reflects an uncertain outlook for the housing market, which after a strong run in

Can the UK emulate Germany's export surge?

Exports are powering economic growth in Germany, but can the same thing happen in the UK? After all, the UK is banking on a rebalancing of the economy away from consumer spending towards exports to drive the recovery. We look at a number of comparable macroeconomic statistics to assess whether the UK is in a position to emulate Germany. Figures for the second quarter of 2010 showed a rise of 2.2% in German GDP, the best performance amongst the EU economies by far and one of the fastest

Recoveries are never straightforward

Notwithstanding the recent strong Q2 GDP data from the eurozone and UK, signs of economic weakness have led to fears that there could be a ‘double dip’. History shows recoveries are never in a straight line, so fears of a relapse are not unwarranted as output declines can and do quite frequently occur in recovery phases (though not a return to outright recession). In some cases, there is a bounce-back effect as the recovery is almost a mirror image of the downturn. In other cases, the downturn

BoE Inflation Report: King to have the last word, not Sentance

Nine months into a cyclical recovery and the debate over UK monetary policy has become increasingly finely balanced. On the one hand, the pick-up in growth and the elevated level of inflation have strengthened the case for a preemptive rise in interest rates to start soon. On the other, the degree of uncertainty about the durability of the recovery and the potential disinflationary forces that could yet emerge have raised the possibility that more, not less, stimulus may be required. So which

Markets to focus on US private sector job creation, policy meetings

The highlight of the week in the UK is the BoE policy announcement which will be made in light of the latest Inflation Report forecasts. No change is expected to bank rate or the size of the QE programme, but views on the MPC are clearly divided. For the third month in a row Andrew Sentance is expected to vote for an interest rate hike, but there is little to suggest that he will find support from his colleagues. In fact, in early July, for a number of MPC members, the immediate decision was

World growth still on track

Fears are growing that the global economic recovery is already running out of steam. A plethora of economic data in a number of countries over the last month or so have shown that economic growth is slowing. In the US, the housing market is under renewed downward pressure as official support is gradually withdrawn. At the same time, US employment growth remains sluggish. In Europe, the problems of Greece, Portugal, Italy and Spain dominate the agenda as high levels of government debt have led

How big a risk is UK inflation?

The persistent overshoot of UK CPI inflation above the government’s 2 per cent target has started to raise concerns that price pressures are becoming entrenched. In 19 of the past 27 months, annual CPI inflation has exceeded the market consensus expectation, suggesting the models adopted by the economics community have failed to fully capture the current dynamics driving UK inflation or its measurement. In June, the annual CPI rose by 3.2%, the eighth consecutive month it has been above the 2

Will public sector spending cuts push the UK back into recession?

The austerity package announced in the emergency Budget has raised concerns that the degree of public spending restraint could tip the UK back into recession. On the face of it, these concerns are understandable. With total spending cuts amounting to £99bn (or 5.2% of GDP) and tax increases of £29bn (2% of GDP) planned by 2015-2016, the fiscal squeeze is the most aggressive since the Geoffrey Howe Budget in 1981. In this weekly, we examine the size of the spending cuts put forward by the

Taylor rule suggests rates to stay low

Concern about the health of the world economy has risen in recent weeks. Widespread declines in leading indicators of economic activity, particularly of PMI indices, suggest that the second half of 2010 could be one of a severe weakening in the pace of economic recovery. At the moment, the decline in some of the leading economic data do not suggest that economic growth at a global level will go negative but the risk is certainly higher. For the advanced economies, the risk of a collapse into

US payrolls to show sharp decline

This week is considerably quieter in terms of UK economic data. Several housing market releases should get the most market attention, with net mortgage lending and mortgage approvals for May, as well as the Nationwide house price index for June, providing the latest snapshot of the current state of activity. Both lending and approvals have trended sideways over the past few months, and more of the same is expected, with net lending likely to remain around £0.5bn and approvals up very

Structural deficit poses challenge for the Chancellor

The Office for Budget Responsibility’s (OBR) first report has underscored the need for significant fiscal restraint in this week’s Budget. But by how much more does fiscal policy need to be tightened? In this week’s commentary, we assess the implications of the OBR’s forecasts for the state of the UK’s fiscal finances and the UK economy. OBR versus Budget 2010 In the March 2010 Budget, the Labour government projected that total public sector net borrowing would fall from £166.5bn (11.8% gdp)

Falling money supply suggest global recovery not secure

In all of the furore surrounding the sovereign debt crisis in Europe and the impact on the euro and US dollar, attention has drifted from some recent developments in monetary data that suggest all is not well with the global economy. In summary, broad monetary data are suggesting that the world economy is operating at two speeds. In the developed economies, money supply data suggest that the economic recovery, though underway, is not secure and growth is slow, see chart a. By contrast, money

Can the UK export its way to growth?

High levels of indebtedness, credit constraints and forthcoming fiscal austerity raise the likelihood that UK domestic demand will remain relatively weak over the next few years. As such, it raises the question of where UK economic growth will come from. Hence, it is important the UK maximises the opportunity it currently has to boost net trade through a weak exchange rate and low wage inflation. The challenge is a huge one, but not beyond the UK’s capability. Over the past forty years, the

Are global imbalances returning?

After a period of narrowing, the US current account deficit may soon start widening again, if recent currency and growth trends persist. Global financial market volatility has returned with a vengeance. As a result, the US is once again seen as a safe haven, and the dollar is rising as buyers drive up the price of US assets. On one level, this could simply be seen as bad news for the sustainability of the global economic recovery. A rise in the dollar should slow US growth, give rise to

Can the Euro-zone survive the Greek tragedy?

Can the euro-zone survive the crisis of confidence that is currently washing over the peripheral highly-indebted countries of Europe? That is the question that speculators are now daring to ask, as the fiscal crisis in Greece threatens to spill over into Spain, Portugal, Ireland and Italy. After a decade of relative stability, policy-makers across the single currency area are now being forced to address the gaping fault-line that has been exposed in the EMU architecture – namely, whether a

Budget deficit is focus of new UK government

The focus of the new coalition government – the first in over 70 years - has been made crystal clear: lowering the budget deficit and reversing the rise in debt. The parties agreed that tackling the deficit is the best way to ensure economic recovery, so there needs to be: ‘a significantly accelerated reduction in the structural deficit over the course of a Parliament with the main burden of deficit reduction borne by reduced spending rather than increased taxes’. This clearly lays out the new

UK economy faces reality of a hung parliament

Overview The UK has just had one of the most hotlycontested general elections in living memory. It has resulted in a hung Parliament as expected. This means that no party can form a government on its own. So a coalition or minority government is now a certainty. There is also a high risk that this sort of government will not last the full fiveyear term. With many permutations of minority or coalition government possible, we will focus on the task facing the next government. However, it is

What impact will the UK Election have on FX and bond markets?

Prospects of a hung parliament have, until recently, weighed on the pound… With less than a week to go before the General Election, both the pound and UK bond markets appear remarkably unaffected, despite the heightened probability of a hung parliament. In the weeks leading up to the first Prime Ministerial debate, there was quite strong evidence that an increased risk of a ‘hung’ parliament was correlated with a weaker pound. The theory is that a hung parliament is synonymous with weak

UK inflation to fall back sharply over the coming year

Recent inflation developments have raised the spectre of a possible resurgence of sustained price pressures in the UK. Since dropping to a low of 1.1% last September, the annual rate of consumer price inflation has risen to 3.4% (see chart a). CPI inflation has now been above the government’s 2% target for four consecutive months, with the move above 3% in January prompting the BoE Governor to write an open letter of explanation to the Chancellor, explaining the reasons for the overshoot and

UK election build-up to shine spotlight on Q1 GDP...

In the UK, Friday’s preliminary Q1 GDP data release is crucial in its own right, but takes on extra importance so close to the general election on 6 May. Recently-published February industrial output figures – which surprised on the upside – argue for a reasonably firm GDP number. We look for an outturn of +0.4% quarter-on-quarter. Meanwhile, we look for CPI to register 3.1% in the year to March, slightly above February’s outturn of 3.0%. We see few special factors affecting the inflation

Markets eye Bernanke and developments in China & Greece

Following last week’s decision by the Bank of England to keep its monetary policy unchanged, the UK sees a fairly quiet week in terms of economic data releases. Trade data can be volatile, but we look for an improvement in the UK’s visible balance to a shortfall of £7.4bn in February compared with January’s reading of £8.0bn. We look for this to be driven by trade with non-EU countries, rather than the EU where demand for UK exports may have weakened in response to a fragile economic recovery