uk next week’s agenda and wrap up, apr 29 may 3research.handelsbanken.se/attachments/19532/uk next...
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UK Next Week’s Agenda and Wrap Up, Apr 29 – May 3 - Headlines for the UK and global economy
- Wrap up
- Next week’s agenda
- Financial overview
- Government bond yields
- Financial forecast
- Chart of the week
- The economy
- News and statements during the week
Helena Trygg, +46 8 701 12 84, [email protected]
www.handelsbanken.se/research
26 April, 2013
2
UK
Headlines for the UK and key global highlights
UK
Public finances for the full financial year 2012-2013 showed that public sector net borrowing exluding both Royal Mail
and asset transfers from Asset Purchase Facility (AFP), was GBP 120.6bn, GBP 0.3bn lower than the last financial
year and slightly lower than the OBR estimate from March. Weaker than expected central government receipts and
slightly higher local authority borrowing were offset by lower central government expenditure and lower borrowing by
public corporations.
Retail sales index fell unexpectedly to an eight-month low in April due to lower clothing and home improvement sales.
But more worrying was the fall in total order book balance recorded by the CBI. The CBI Industrial Trend survey
painted a mixed picture, where business and export optimism were more optimistic than last quarter. The monthly
survey was more pessimistic and export orders fell along with volume of output for the next three months in April
compared to the March survey, according to CBI.
First estimate of Q1 GDP was positive news. GDP in Q1 was reported to have increased by 0.3 percent and compared
to Q1 last year, GDP was 0.6 percent. The largest contribution came from the services industry. However, information
content of this first estimate is around 44 percent of the total required for the final output based estimate. Read our
analysis on page 9 and 10 in this publication.
Global
US – In Q1, GDP rose by 2.5 percent in annualised q-o-q terms versus 0.4 percent in Q4 2012. The weaker-than-
expected rate was to large extent driven by high imports and declining national defence spending. We expect GDP to
continue to grow by 2.5-3.0 percent in annualised q-o-q terms for the rest of the year. We are not concerned by the
worse-than-expected incoming data recently and particularly not by the weak non-farm payroll reading in March, which
we believe will bounce back already in April. A sharp recovery of the housing market, stronger exports and an
expansive monetary policy should continue to support the economy and help weather headwinds from an expected
fiscal tightening.
3
UK
Wrap Up, April 22 - 25
Monday
No major events
Tuesday
Public finances, Mar 31.3bn (e: 18.0bn, p: -1.6bn)
Public sector net borrowing ex interventions, Mar
15.1bn (e: 15.5bn, p: 5.6bn)
Public sector net borrowing, Mar 16.7bn (e: 13.8bn,
p: 7.2bn)
CBI Trends total orders, Apr -25 (e: -13, p: -15)
CBI trends selling prices, Apr 8 (e: 5, p: 5)
Wednesday
BBA Loans for house purchases, Mar 31.227k (e:
31.4k, p: 30.579k)
CBI Reported sales, Apr-1 (e: 8, p: 0)
Auction of 0 1/8% Index-linked Treasury Gilt 2029
Thursday
GDP Q1, first estimate 0.3/0.6 (e: 0.1/0.4, p: -0.3/0.2)
Index of services, Feb 0.8/0.1 (e: 0.2/-0.1, p: 0.3/-0.3)
Handelsbanken publishes Macro Forecast
Friday
T-bill auction
m-o-m/y-o-y a = Actual e = Estimate p = Prior
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UK
Next week’s agenda, April 29 – May 3
Monday
Hometrack housing survey, Apr (p: 0.3/0.0)
Tuesday
GfK Consumer survey, Apr (e: -26, p: -26)
Net consumer credit, Mar (e: 0.5bn, p: 0.6bn)
Net lending secured on dwellings, Mar (e: 0.6bn, p:
0.9bn)
Mortgage approvals, Mar (e: 52.7k, p: 51.7k)
Money supply M4, Mar (p: -0.5/0.5)
Auction of GBP 500 million 0.375 percent I/L 2062
Bonds
Wednesday
PMI manufacturing, Apr (e: 48.5, p: 48.3)
Nationwide house prices, Apr (e: 0.3/1.3, p: 0.0/0.8)
Thursday
PMI construction, Apr (e: 48.0, p: 47.2)
Friday
PMI services, Apr (e: 52.3, p: 52.4)
Auction of GBP 500 million 27 day bills
Auction of GBP 500 million 90 day bills
Auction of GBP 1 billion 181 day bills
m-o-m/y-o-y a = Actual e = Estimate p = Prior
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UK
Financial overview
6
UK
Government bond yields
7
UK
Financial forecast
Policy rates last 3 months 6 months 12 months
USA 0.125 0.125 0.125 0.125
Eurozone 0.75 0.50 0.50 0.50
United Kingdom 0.50 0.50 0.50 0.50
Ten year government bond yields
USA 1.74 1.75 1.80 2.00
Eurozone 1.23 1.30 1.30 1.50
UK government bond yields
2 year 0.25 0.25 0.40 0.60
5 year 0.69 0.70 0.85 0.95
10 year 1.72 1.75 1.90 2.10
UK swaps
2 year 0.58 0.60 0.75 0.90
5 year 0.93 0.90 1.15 1.30
10 year 1.85 1.85 2.05 2.15
FX last 3 months 6 months 12 months
EUR/USD 1.30 1.28 1.23 1.10
EUR/GBP 0.842 0.860 0.840 0.820
GBP/USD 1.54 1.45 1.46 1.34
8
UK
Chart of the Week – UK 5Y CDS unchanged despite downgrade
9
UK
The economy – avoiding a triple dip
Finally – some good news. GDP was 0.3 percent in the
first quarter. The UK economy has avoided a triple dip.
GDP in Q1 compared to Q1 2012 was 0.6 percent.
By far, the largest contribution to the increase came
from services and also, surprisingly, a positive
contribution from the production industry. However,
these increases were partially offset by downward
contributions from the construction and agriculture
industries.
At this stage it is estimated that the information content
of this first estimate is around 44 percent of the total
required for the final output based estimate. Next
publication of second quarter estimate will be published
23 May.
GDP details since the first quarter of 2008 show that
government spending has been the main driver of
growth so far. Private sector domestic demand has
been weak due to tighter credit conditions, high inflation
causing negative real wages, and the ongoing squeeze
from fiscal austerity. As we have said, there will be no
fast rebound for the British economy, despite some
signals suggesting slightly better sentiment in many
sectors.
Looking forward, we have revised our GDP forecast for
the UK to 0.8 percent (earlier 1.0 percent) this year, and
to 1.3 percent 2014 (previous 1.4 percent) and added
our GDP forecast for 2015 to 1.1 percent.
10
UK
New macro forecast - The debt hangover continues
The balancing act between tight fiscal policy and expansionary monetary policy continues. The Chancellor of the Exchequer has stubbornly been holding to the
fiscal austerity plan that was presented in 2010. Even though some stimulus will be implemented in the years ahead, the price paid will be spending cuts within
other areas. The loss of overall production is still approximately 3 percent since the GDP peak and the weak performance is now very clear relative to other
developed countries, with the exception of the eurozone.
However, barometers and indicators in the first quarter pointed to slightly more positive sentiment and household consumption has been surprisingly resilient in the
aftermath of the financial crisis, despite high inflation and fiscal austerity. The sentiment for a rebound is still weak. Recent surveys show that small- and medium-
sized companies are being squeezed by tighter credit conditions. While demand from this sector has increased, actual lending to companies has not, despite the
Funding for Lending Scheme (FLS) being implemented to boost lending. The FLS has not been a success so far. One factor of the slow and modest recovery is
that restricted credit availability to small- and medium-sized companies must ease. Small- and medium-sized companies comprise around 60 percent of all
companies in the UK; the chances of a recovery are skewed to the downside if credits remain muted.
Surprisingly, GDP details since the first quarter of 2008 show that government spending has been the main driver of growth. Private sector domestic demand has
been weak due to tighter credit conditions, high inflation causing negative real wages, and the ongoing squeeze from fiscal austerity. As we have said before, there
will be no fast rebound for the British economy, despite some signals suggesting slightly better sentiment in many sectors. Looking forward, with a stubborn
Chancellor standing by the fiscal austerity programme and with the paradox of government spending being the main growth driver so far, what will be the engine of
GDP ahead?
The puzzling labour market figures continue to raise questions. Employment has continued to increase, albeit on a slow path. Nevertheless, the gap between GDP
and employment has not been wider since early 1990s. The big picture is that while most businesses are experiencing decreasing profits, the number of employees
is increasing. Surprisingly, the age group that has seen a fall in employment is 35-49 years old. We expect the labour market to soften this year and next due to a
slow and stagnating economic performance.
The amount of spare capacity in the economy, the output gap and the growth rate of potential GDP are key judgements in any forecast. Together, they determine
the scope for actual growth as activity returns to a level consistent with maintaining stable inflation in the long term. For now, the amount of spare capacity in the
British economy is rather big. Both the OBR and OECD estimate of the output gap in the UK is approximately 2-2.8 percent. Actual GDP is currently 3 percent
below its 2008 peak. The OECD has also calculated long-term projections for the output gap and says that the UK economy will not return to full employment until
2020. That supports our view of a slow and restrained recovery.
One reason why the manufacturing sector is shrinking is the combination of lower productivity figures and the resulting increase in unit labour costs. Even if output
has performed quite well so far this year, profits within manufacturing companies are decreasing. So, will the services sector lead the economy towards recovery?
Remember that the financial sector was the main driver of growth up until 2007, but it has now decreased and its former growth rates are history.
The monetary policy committee at the Bank of England is divided. Three out of nine members have voted for more QE at the three latest meetings, with Governor
King one of them. Expectations are that the incoming Governor (Mr. Carney, who will start on July 1) will provide more monetary policy stimulus to the faltering
economy. Even inflation increasing above target has not stopped the MPC pressing the “print more money” button in the past. Our view is that if indicators turn
more negative before the summer, the BoE will expand asset purchases in an attempt to bring the UK out of recession.
Read our Macro forecast
11
UK
News and statements during the week
The pound surged to a two-month high against the dollar after a government report showed the
british economy grew more last quarter than analysts forecast, ensuring the nation avoided a triple-dip
recession. Sterling advanced at least 0.4 percent against all 16 of its major counterparts after the Office
for National Statistics said gross domestic product expanded 0.3 percent in the first quarter. The median
forecast of economists in a Bloomberg News survey was for 0.1 percent growth. The Bank of England
next meets on May 8-9 after policy makers were split this month on the need to provide more stimulus to
the economy. UK government bonds declined. (Bloomberg)
The Bank of England has announced plans to expand a lending scheme designed to help
businesses and households. The Funding for Lending Scheme (FLS), due to end in January 2014, will be
extended for another year to 2015. Banks will be given greater incentives to lend to small and medium-
sized businesses, and creditors other than banks will be able to participate. Since its launch in August,
the scheme has been criticised for failing to boost lending. The scheme is supposed to encourage banks
to lend by offering them cheap loans on the condition they pass them on to customers. (http://www.bbc.co.uk/news/business-22275344)
The Fitch credit ratings agency has downgraded the UK to AA+ owing to a weakened economic
outlook. The move, after Moody's downgrade in February, came as Chancellor George Osborne
defended the government's austerity plan. Fitch said its downgrade primarily reflected a weaker
economic and fiscal outlook. Mr Osborne has said his was the "right plan" and that the economy was
"healing". Fitch said its downgrade "primarily reflects a weaker economic and fiscal outlook" but returned
its outlook to "stable", removing the threat of further rate action in the near term. (http://www.bbc.co.uk/news/business-22219382)
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