Preliminary Q1 GDP data Wednesday is relatively interesting after economic activity fell 0.3% in Q4. Two consecutive quarters of decline would imply that the UK is in a technical recession like the eurozone. However, Danske doubt that growth was also negative in Q1 and see a modest 0.2% expansion due to a pickup in private consumption. Bank of England minutes suggest that the Monetary Policy Committee is prepared for the worst: ‘the contraction in measured construction output was likely to depress measured GDP growth significantly in the first quarter’. The estimate range is between -0.3% and 0.4%, so there is room for some movements on the back of the number. Danske believe the effect will be biggest if data shows another negative quarter with a weaker GBP and lower yields but the reaction should still be limited as the BoE made it relatively clear that this round of QE will come to an end when the current programme ends in early May. If Danske are right and Q1 growth was modestly positive, yields will probably rise slightly and the GBP strengthen a bit. Other interesting UK releases include the public sector net borrowing stats on Tuesday, the CBI sales report on Wednesday, the Nationwide house price index and GfK’s consumer confidence indicator on the night to Friday.
Bank of England (BoE) rate decision minutes show eight members preferred to keep the asset purchase target at £325bn, with only one member (David Miles) preferring to lift the QE ceiling – and only by £25bn. Miles said the decision was ‘finely balanced’, which does not exactly promise significant money printing. Adam Posen – former super-dove and previous defender of significant monetary intervention – backed down and joined the committee. This was somewhat strange, as he voted for more QE last month when the current buying programme was far from finished. All members preferred to leave the base rate at 0.5%. The latest inflation data is probably behind the change in perception, as March inflation rose 0.3% to 3.5% y/y, more than predicted. Inflation has been stickier than the BoE forecast earlier this year and not many believe CPI will hit 2% by year-end as previously predicted.
Based on Posen’s change of mind – it is unlikely that he will change his mind again in May – Danske changed their forecast from another £25bn in May to none. In Danske’s view, this is not satisfactory, as they have argued strongly for the need for further stimulus but the route to a majority – five of the MPC’s nine members – is simply too far with Posen out of the equation. Danske fear that the UK economy will miss the monetary stimulus when the recovery remains fragile and fiscal policy is being tightened significantly, which should be offset somewhat by monetary easing. Time will show whether the BoE is right in this or whether this is just another central bank worrying about inflation when focus should be elsewhere (example ECB rate hikes April and July 2011). The BoE stopping QE is bad news for Gilts but investors will continue to buy Gilts as protection from the European debt crisis. With the BoE switching to neutral, it opens the way for further downside to EUR/GBP and 0.80 could be the next level to be tested. Danske plan to revise their GBP outlook over the coming days.
The expiry of the stamp-duty holiday last month looks set to be a turning point for the housing market. Purchases brought forward to take advantage of the tax break are likely to leave a vacuum in Q2. Moreover, falling mortgage availability will provide additional headwinds. This should create some downward pressure on house prices. However, even Lloyds TSB were taken aback by the 1% drop reported in the Nationwide’s March index. Lloyds TSB suspect that much of this reflects volatility and with the RICS survey continuing to point to an improving price background in April, Lloyds TSB forecast a 0.6% rise this month. However, Lloyds TSB remain downbeat on the outlook for housing over the coming quarters and still suspect the most likely outcome for house prices this year is stagnation.
Ministers have been ordered to prepare up to £16bn of further spending cuts amid warnings that it could take years to get the economy back on track. The plans emerged as former Chancellor Ken Clarke yesterday warned it would take ‘long hard work’ before the economy returns to normal. ‘2012, I think, will undoubtedly be challenging,’ he said. Treasury Chief Secretary Danny Alexander will tell colleagues they must draw up lists of projects that could be axed in an emergency. Whitehall departments will be told to create their own ‘rainy day funds’ so they don’t draw on the Treasury’s national reserves, slashed from £4bn to £2.8bn, The Daily Mail says.
A financial lifeline will be thrown this week to about 350 companies struggling to fund deluxe final salary pension schemes against the backdrop of a faltering economy. The unprecedented ‘pragmatic’ move by The Pensions Regulator is designed to safeguard the pensions of hundreds of thousands of workers by giving employers more time to address yawning deficits. Without the regulator’s decision to relax its approach to the funding of pension deficits – estimated to total about £255bn – it is feared that many scheme sponsors would be in danger of failing to meet their pension promises The Mail on Sunday reports.
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