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Bank of England Minutes for April and First Quarter GDP Data Dominate Forthcoming UK Economic Releases18 Apr 08The minutes of the April meeting of the Bank of England's Monetary Policy Committee will be studied closely for clues at to when the bank is likely to cut interest rates again. Meanwhile, GDP data will provide an important snapshot of just how weak the U.K. economy was in the first quarter of 2008. Wednesday sees the release of the minutes of the April meeting of the Bank of England's Monetary Policy (MPC) where interest rates were cut from 5.25% to 5.00%. Despite current elevated inflation dangers, we expect all nine of the MPC members to have been in favor of cutting interest rates due to the heightened downside risks to growth stemming from markedly tighter credit conditions, elevated market interest rates, and a very weak housing market. If all nine MPC members were indeed in favor of April's cut, it will increase expectations that the Bank of England will cut interest rates again by June and possibly even as early as May. Expectations of a further near-term interest rate cut will also rise if it turns out that a larger 50-basis-points reduction from 5.25% to 4.75% was discussed at April's MPC meeting, and whether any committee member was in favor of such a move (David Blanchflower being a particularly likely candidate). In contrast, a relatively tight split-vote in favor of cutting interest rates in April would dilute expectations of further near-term action by the Bank of England. We expect the Bank of England to continue to enact steady, but gradual, interest rates cuts. We forecast the next 25-basis-point cut to 4.75% to occur in June, but certainly would not rule out a May cut. Further out, we anticipate that interest rates will fall to 4.25% by the end of 2008 and to 4.00% in the first quarter of 2009, as extended below-trend growth increasingly undermines companies' pricing power and limits wage growth. Another key event sees GDP data for the first quarter of 2008 released on Friday. We expect GDP growth to have moderated to 0.4% quarter-on-quarter (q/q) and 2.5% year-on-year (y/y). This would be down from growth of 0.6% q/q and 2.8% y/y in the fourth quarter of 2007 and a peak of 0.8% q/q and 3.2% y/y in the second quarter of last year. It would also be the weakest quarter-on-quarter growth rate since the first quarter of 2005. Data will only be released for the output side of the economy, and we expect this to reveal that the service sector lost significant momentum while industrial production was essentially flat. Latest available data show that industrial production was unchanged in the three months to February compared to the three months to November 2007, while service sector output growth slowed to 0.5% in the three months to January from 0.7% in the three months to December and 0.9% in the three months to September. The index of services (also out on Friday) is expected to show that services output slowed further to 0.4% in the three months to February. While we believe (or is it hope?) that the United Kingdom will avoid recession, we suspect that it will see an extended period of markedly below-trend growth. We forecast GDP growth to slow sharply from 3.0% in 2007 to 1.6% in 2008 and 1.5% in 2009, as seriously pressurized consumers tighten their belts, business investment loses significant momentum, and exports are hit by slower growth in key markets (although exports will benefit from a weaker pound). This would be the weakest growth performance since 1992. Furthermore, we believe the risks to these GDP forecasts are slanted to the downside, particularly in 2009. Retail sales were surprisingly robust in the first two months of 2008. However, we expect sales to have fallen by 0.4% month-on-month in March, indicating that consumer spending is now starting to falter markedly in the face of mounting headwinds that has seen confidence fall to a 15-year low. These headwinds include muted disposable income growth, tighter lending conditions, a substantially weakening housing market, lower equity prices, and increased debt levels. Household purchasing power is also being dented by higher utility bills and elevated food prices, while many homeowners are re-fixing their mortgages at significantly higher rates as the deals they took out a couple of years ago expire. Furthermore, elevated concerns about the economic outlook are probably leading to an increasing number of consumers tightening their belts. On top of this, we suspect that unemployment will start to rise later in 2008. Likely further gradual Bank of England interest rate reductions will help the consumer, but will only partially offset these major headwinds. This year's earlier Easter could lead to retail sales surprising on the upside in March, but it is notable that the British Retail Consortium for the month was markedly weaker. Meanwhile, the Bank of England will be particularly interested in the retail sales price deflator for March, to see if retailers believe that there is a growing need to offer incentives to get pressurized consumers to shop. A sharper fall in the retail price deflator would be good news for the Bank of England, but bad news for retailers' margins and profits. Thursday sees the release of the CBI industrial trends survey for April. Although latest hard data show that manufacturing output was surprisingly resilient in January and February, the CBI survey is expected to indicate that the manufacturing sector is now being increasingly pressurized by slowing domestic demand, tighter credit conditions, and elevated energy and commodity prices. Furthermore, we strongly suspect that markedly slowing growth in the Eurozone and recession in the United States will weigh down on exports, although manufacturers should gain some respite from the weaker pound. Specifically, we expect the CBI's survey to show that the balance of manufacturers reporting that their overall orders are at normal levels retreated to +2% in April from +7% in March. In addition, the quarterly CBI survey is expected to show a marked fall in manufacturers' confidence. The Bank of England will be hoping that the CBI survey indicates that manufacturers' pricing power is starting to be diluted by a weakening outlook. The balance of manufacturers expecting to raise their prices over the next three months stood at +25 in March, which was the highest level since May 2007, as well as one of the strongest levels on record. This reflected the desire of manufacturers to pass on their sharply rising input costs to support their margins. By Howard Archer 23 April - Bank of England Monetary Policy Committee vote split, April (Hike-Unchanged-Cut): 0-0-9 24 April - Retail Sales, March (month-on-month): -0.4% 24 April - CBI Monthly Industrial Trends Total Orders, April (balance): +2% 24 April - CBI Quarterly Industrial Trends, Business Optimism, April (balance): -25% 25 April - GDP, First-Quarter 2008 (Quarter-on-Quarter): +0.4% 25 April - GDP, First-Quarter 2008 (Year-on-Year): +2.5% 25 April - Index of Services, February (3-Month/3-Month): +0.4%
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