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UK Jobs Scenario Worsens
By Chris Flood
Financial Times
Monday, March 23, 2009
British consumers have been tightening their belts while unemployment soars and house prices fall.
The consensus forecast is for a fall of 0.2 per cent on the month, which would slow year-on-year growth from 3.6 per cent to 2.7 per cent.
The clear risk is for a larger fall and many analysts suspect the official retail sales data series underestimates the true state of consumer spending. This is widely expected to slow further, due to the economy's deteriorating prospects.
The CBI's distributive trades survey, due on Wednesday, is likely to show the balance of retailers reporting higher sales year-on-year fell from -25 per cent in February to -35 per cent in March, well below the long-term average.
UK retail sales growth chartDetecting grounds for optimism in the current gloom has been difficult. The International Monetary Fund recently warned that recession in the UK could be deeper and longer than in many other parts of the world.
"These [IMF] projections are likely to be proved wrong," says Jamie Dannhauser at Lombard Street Research, who argues the economy should begin to expand in the second half of this year, helped by the combination of near-zero interest rates, quantitative easing and the significant adjustments already undertaken by the business sector.
"No one should doubt the significant structural adjustment that the UK economy is set to go through over the next few years, given the scale of excess debt in the household sector and the spare capacity throughout the UK banking system," says Mr Dannhauser, adding: "But from a cyclical perspective, the British economy appears in better shape than many others, particularly Germany and Japan [which] should expect their worst recessions since the second world war."
James Carrick, economist at Legal & General, also envisages a gradual UK recovery starting later this year. Mr Carrick points to falling mortgage rates for existing homeowners, lower energy prices, sterling's weakness and an improvement in the global economy as factors that will support growth.
Richard Jeffrey, chief investment officer at Cazenove Capital Management, says that an improvement in household cash flows should begin to have a noticeable impact on demand later this year.
Mr Jeffrey says a steeper-than-normal decline in industrial activity has given the impression that the UK economy is set for a deeper and possibly more protracted downturn than normal.
"In actual fact, the threat of a credit crunch may actually have caused companies to take action that now leaves them in a better condition to cope with the next stage of recession than is usual at this stage," says Mr Jeffrey.
In the US, property market stabilisation remains essential for a broader economic recovery.
Existing homes sales, due on Monday, are forecast to fall from 4.49m (annualised) in January to 4.45m in February, while new homes sales, due on Wednesday, are expected to dip from 309,000 in January to 300,000 in February.
US durable goods orders for February, also due on Wednesday, will provide a timely indicator for capital spending. The core measure (non-defence capital goods, excluding aircraft) slumped 5.7 per cent in January, deepening the year-on-year decline from -14.6 per cent in December to -18.8 per cent. The headline measure for durable goods orders is volatile as it includes aircraft. A modest bounce of 2 per cent is expected for the headline measure in February but the core measure is likely to see further weakness in the months ahead.
Fourth-quarter US gross domestic product data are likely to indicate that the downturn in economic activity has been worse than previously thought. The contraction in GDP is likely to be revised from -6.2 per cent (annualised) to -6.6 per cent.
In the Eurozone, the preliminary estimates for the purchasing managers' surveys will confirm that activity continued to weaken in March. The manufacturing PMI is expected to to be little changed from February's 33.5, the lowest since the series started in 1997, while the service-sector PMI is also forecast to be unchanged at 39.2 after a sharp drop in February.
Stuart Green, economist at HSBC, highlights a worrying decline in the new business measure of the service-sector PMI and warns that any signs of stabilisation could lag behind the manufacturing sector.
In Germany, the Ifo business climate survey for March, due on Wednesday, is expected to show confidence remaining at extremely low levels. The headline measure is expected to dip from 82.6 in February to 82.5 with the current conditions component remaining close to its record low. Although the IFO's expectations measure may well show modest improvement for a third month, the data are still consistent with the downturn in German economic activity still gathering pace.
Germany and France both release consumer confidence data on Thursday with further weakness expected due to rising unemployment in both countries.
Eurozone money supply data for February, due on Thursday, will confirm the credit crunch is tightening its grip with annual M3 growth expected to fall from 5.9 per cent to 5.6 per cent, signalling an increasing preference for liquidity.
A key question ahead of the European Central Bank's next meeting on interest rates on April 2 is whether the incoming data will force policymakers to consider the question of quantative easing, a step which they have resisted so far.
Erik Nielsen, economist at Goldman Sachs says he believes the probability of the ECB buying sovereign debt (government bonds) has increased but remains small.
Mr Nielsen says the ECB will try to squeeze every bit possible from its credit easing programme and could cut its main policy interest rates further to 0.5 per cent.
"We also think the ECB will start buying private assets in the market, namely corporate bonds and commercial paper, but in small amounts to restore confidence in the corporate sector and prevent too drastic adjustments in jobs and investment," says Mr Nielsen.
Jacques Cailloux, economist at RBS also says he expects the credit crunch and deflation risks to ultimately push the ECB to embark on quantative easing.
The range of QE options open the the ECB is extremely complex but European policymakers will undoubtedly be giving this policy option urgent consideration after the positive market reaction to the QE steps announced by the UK and US recently.
SOURCE: http://www.ft.com/cms/s/0/819e1b8a-1572-11de-b9a9-0000779fd2ac.html
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