On Wednesday, Federal Reserve Chairman Ben Bernanke delivered a distinctly cautious assessment of prospects for the US economy. Stockmarkets retreated after his comments, which included the observation that prospects were “unusually uncertain”. At the same time, he hinted that the Fed could engage in further policy stimulus should the economic climate deteriorate.

In the UK meanwhile, the minutes of July’s MPC meeting showed that, as expected, Andrew Sentance voted for a second consecutive month to raise interest rates. But speculation that one other member might have voted for a rise proved to be wide of the mark, and he was again the sole dissenting voice. Indeed, the minutes also showed that the Committee considered the arguments both for tightening and for loosening policy, suggesting that the MPC is in no rush to raise interest rates.

UNITED KINGDOM

Growth The preliminary estimate of GDP indicated that the economy grew by a surprisingly strong 1.1% during the second quarter of 2010. The service sector, which had previously lagged behind the recovery in manufacturing, finally gained traction with growth of 0.9%, while the construction sector delivered an impressive expansion of 6.6%. As expected, manufacturing output continued to grow strongly (up by 1.6% on the quarter), though the latest survey evidence suggests that this growth rate is unlikely to be sustained in the coming quarters.

Retail sales Official retail sales figures for June were also stronger than expected, the volume of sales (excluding petrol) rising by 1.0% on the month. A solid rise of 1.6% in the household goods sector was consistent with suggestions that television sales were boosted by the football World Cup, while warmer weather contributed to a 1.0% rise in clothing sales. The ‘implied deflator’ (an indicator of year-on-year price changes) meanwhile slowed to 0.3% from 0.6% in May, suggesting that higher sales volumes were partly due to heavier discounting.

Manufacturing The CBI’s quarterly Industrial Trends Survey showed a balance of +24% of manufacturers reported that output rose during the three months to July, which was the strongest reading since 1995. Looking ahead to the next three months, output is expected to rise further, though the balance of +6% implies a slower rate of growth, while the balances for expected orders also weakened (both for domestic and overseas orders). Adding to the impression that the sector’s recovery may have passed its peak, the balance for the overall business situation, though still positive, eased back from +24% to +10%.

Bank lending The BBA reported that 34,813 mortgages were approved for house purchase during June, down from 36,418 in May and still well below the levels of 40,000+ that were reported during the second half of 2009. Unsecured lending meanwhile saw a net repayment of £0.2 billion, a small increase in credit card lending being offset by a slightly larger net repayment in personal loans and overdrafts. Lending to businesses meanwhile shrank further, though June’s net fall of £1.1 billion was a little smaller than the average decline of £1.9 billion over the previous six months.

Public finances Public sector net borrowing in June was higher than expected at £14.5 billion. May’s figure, moreover, was revised a little higher, with the result that cumulative borrowing for the first three months of 2010/2011, at £40.3 billion, is only marginally below the corresponding figure for the previous fiscal year. These figures dampened hopes that the public finances might improve more quickly than the OBR has predicted. The ratio of debt to GDP meanwhile continued to edge higher, reaching 63.9%.

EUROPE

France Business sentiment improved in July, the official index rising two points to a two-year high of 98. The corresponding index of consumer confidence was unchanged at -39, slightly better than expected but still a relatively muted reading by historic standards. This was in keeping with a disappointing consumer spending report, which showed that spending on manufactured goods fell by 1.4% in June.

Germany The Ifo survey reported a further improvement in business sentiment during July, with higher readings in both the ‘expectations’ and the ‘current conditions’ components. The headline business climate index rose sharply from 101.8 to 106.2, its highest level in three years.

UNITED STATES

Housing market New housing starts were weaker than expected, falling by 5.0% in June to an annualized rate of 549,000 units. But a modest upturn in the issuance of new building permits suggests that this downward trend could at least flatten out in the coming months. Sales of existing homes meanwhile fell for a second consecutive month in July, though the 5.1% decline (to an annualized rate of 5.37 million units) was slightly less than had been expected.


THE WEEK AHEAD

In the USA, the first estimate of second-quarter GDP is released on Friday and is expected to show quarterly growth in the region of 0.7% – not quite as strong as this week’s UK figure but sufficient perhaps to assuage growing fears about a ‘double-dip’ recession. But we are also likely to see more signs of renewed weakness in the housing market, where the homebuyer tax credit (which expired at the end of April) has clearly had the effect of bringing forward sales from future months: June’s figures for sales of new homes are therefore likely to show a further decline. The Conference Board’s index of consumer confidence, released on Tuesday, is also likely to remain subdued thanks to ongoing concerns about the strength of economic recovery.

In Europe, market sentiment at the start of the week will likely reflect the results of the ‘stress-tests’ that have been conducted on 91 European banks. These are due to be published today (Friday 23 July) at 5pm, and the general view is that the vast majority will pass the tests, though there has been speculation that some Spanish savings banks may have failed. Concerns about the sector as a whole are unlikely to disappear completely, however, with some analysts suggesting that the tests have not been sufficiently rigorous.

UK data next week are rather thin on the ground, and pertain mainly to consumer sentiment and spending. The measures announced in the Emergency Budget may weigh further on confidence, bringing a further slight decline in the GfK index which is released on Friday. Before that, the CBI’s Distributive Trades Survey will report on retailers’ perceptions of the current business climate: if this week’s official figures are anything to go by, it seems that the prospect of a sharp fiscal tightening has not yet caused shoppers to stop spending.

Mon USA New home sales (Jun)
Tue UK CBI Distributive Trades Survey (Jul)
Tue USA S&P/Case-Shiller house price index (May); Consumer confidence (Jul)
Wed Japan Tankan survey (Jul)
Wed USA Durable goods orders (Jun)
Thu UK Mortgage lending and Consumer credit (Jun)
Thu Germany Unemployment (Jul)
Fri UK GfK consumer confidence (Jul)
Fri EMU Unemployment (Jun); Consumer price inflation (Jul, flash estimate)
Fri USA GDP (Q2, first estimate)

Successful auctions of government debt by Spain and France this week alleviated some of the perceived stresses in the eurozone’s financial markets. Sentiment about the US economy, however, turned somewhat more negative this week, not helped by weak data from both the consumer and the industrial sectors.

In the UK meanwhile, this week’s consumer prices data showed inflation slowing, but not by as much as had been expected. The latest rather modest decline will have done little to alleviate the concerns of those MPC members who may be concerned that inflation is staying too high for too long. Indeed, shortly after the figures were released, Andrew Sentance delivered a speech which repeated his call for an immediate rise in interest rates. But with the latest economic data – including this week’s labour market figures – still pointing to considerable uncertainties about the pace and sustainability of recovery, it is likely that most MPC members will prefer to ‘wait and see’.

UNITED KINGDOM
Growth The latest GDP estimate confirmed that the UK economy grew by 0.3% during the first quarter of 2010. The data included a small upward revision to service sector growth (from 0.2% to a still-muted 0.3%) but this was offset by downward revisions to construction and industrial production. The most encouraging feature of the latest figures was a robust 6.5% rise in investment, but consumer spending fell slightly. The biggest disappointment was the weakness of exports which fell by 1.7% on the quarter, so that net trade deducted 0.9% from overall GDP growth; this suggests that the desired rebalancing of activity away from domestic demand remains elusive.

Inflation Consumer price inflation slowed again in June, the annual rate easing back to 3.2% from 3.4% in May. This was a touch higher than many analysts had expected, however, and with petrol prices providing the biggest downward contribution, the ‘core’ rate (which excludes food and energy) rose from 2.9% to 3.1%. The RPI inflation rate meanwhile edged down from 5.1% to 5.0%.

UK labour market Claimant unemployment fell by 20,800 in June, its fifth consecutive monthly decline. In contrast to previous months, this was accompanied by a decline in the broader ILO measure of unemployment, which fell by 34,000 during the three months to May. The number of people in work, moreover, rose by 160,000 during the same period. It was not all good news, however, the rise in employment being entirely down to part-time work and movement into self-employment; part-time working now accounts for the highest proportion of total workers since records began in 1992. The number of full-time employees meanwhile continued to fall, a decline of 22,000 contributing to a renewed weakening of pay growth: in the three months to May, annual growth of average earnings (excluding bonuses) eased back to 1.8% from 1.9% in April.

Housing market In the RICS housing market survey for June, a balance of +9% of respondents reported rising prices. A positive balance implies that prices are still rising, though the lower reading – down from +21 in May and +18 in April – implies that the rate of increase has slowed. The survey also reported that new buyer enquiries were lower, while new instructions to sell rose sharply following the abolition of HIPs in May. Reflecting this shift in the supply/demand balance, price expectations turned slightly negative, the net balance slipping from +4% to -4%.

EUROPE
Inflation Eurostat confirmed that the annual rate of consumer price inflation across the eurozone slowed to 1.4% in June from 1.6% in May. ‘Core’ inflation (excluding energy and food) remains more subdued, though the annual rate ticked up slightly from 0.8% to 0.9%.

Industrial production Industrial production in the Euro Area rose by 0.9% during May. This was a touch weaker than expected, but output was still up by a healthy 9.4% from a year earlier (only slightly below the previous month’s record annual gain of 9.6%).

UNITED STATES
Retail sales The latest retail sales figures pointed to slowing momentum in the consumer sector as total sales fell by 0.5% during June, the second consecutive monthly decline. Automobile sales fell by 2.3% and gasoline sales were down by 2.0%, the latter reflecting lower petrol prices. Underlying sales (excluding cars and petrol) were a little more resilient and eked out a 0.1% monthly gain.

Industrial production Manufacturing output fell by 0.4% during June, ending a three-month run of rising output. This contributed to a disappointing monthly rise of just 0.1% in the broader measure of industrial production

Inflation Consumer prices were a touch weaker than expected, with headline prices falling by 0.1% during June (its third consecutive monthly decline), while core prices (excluding food and energy’ rose by 0.2%.

Trade balance Exports grew by a solid 2.4% during May, but a 2.9% rise in imports meant that the monthly trade deficit widened unexpectedly to $42.3 billion from $40.3 billion in April. The rise in imports was led by a 12% increase in shipments from China, which may renew concerns among American politicians about the slow pace of renminbi appreciation.

CHINA
GDP growth in the second-quarter of 2010 was a touch softer than expected, the annual growth rate slowing to 10.3% from a two-year high of 11.9% in the first three months of the year. More striking was the weakness of consumer price inflation, the annual rate falling unexpectedly to 2.9% in June from 3.1% in May. Other data for June were consistent with an orderly slowdown in the pace of growth: industrial production was up by 13.7% from a year earlier (down from a 16.5% increase in May); and annual growth of urban fixed-asset investment at 25.5% was a touch lower than in May.

THE WEEK AHEAD…
Coming hard on the heels of the delayed final estimate of UK economic growth in the first quarter, the Office for National Statistics will issue its preliminary estimate of second-quarter growth on Friday. Recent survey results suggest quarterly growth of around 0.6% (though the outlook for the remainder of the year looks a little weaker).

On Wednesday, meanwhile, the Bank of England releases the minutes of July’s MPC meeting, and we expect these to show that Andrew Sentance repeated his call for an early rise in interest rates. For the moment, we expect that he is likely to remain in a minority of one, though the policy debate is clearly heating up. Other data released next week – which will influence that debate – include the public finances (on Tuesday) and official retail sales data on Thursday.

Elsewhere, data from the USA next week include the monthly releases showing new housebuilding starts and sales of existing homes: these may provide some clues about the extent of the renewed weakness in the US housing market. Meanwhile, the Ifo Business Climate survey from Germany will provide an insight into how businesses in the Euro Area’s largest economy are currently faring.

Tue - UK - Public finances (Jun); CBI Industrial trends survey (Jun)
Tue - USA - Housing starts (Jun)

Wed - UK - MPC minutes (July meeting)

Thu - UK - Retail sales (Jun)
Thu - USA - Existing home sales (Jun)

Fri - Germany -Ifo Business Climate survey (Jul)
Fri -UK -GDP (Q2, first estimate)

The fickleness of financial markets was again on display this week. With equity markets having slumped last week on fears of a faltering global recovery, they duly rebounded this week even though those concerns remain as potent. Amid the usual conflicting signals coming out of the economic data and company announcements, it may simply be that some market players came to believe that the recent sell-off had been overdone.
After the excitement of last week’s interest rate rise by the Riksbank in Sweden, the announcements by the Bank of England and the ECB on 8th July brought no changes and nothing significant in the accompanying statements.

PMI surveys
June’s crop of Purchasing Managers’ Index surveys saw an across-the-board deterioration in the headline readings. While the indices remain well above the 50 ‘no change’ level, June’s pull-back was a good deal more marked than May’s marginal falls. A common feature was slower growth of order books, suggesting that the recent deterioration is more than a blip. In the UK, the most worrying symptom was a decline of nine points in the new export orders component of the manufacturing PMI, which adds to the already large weight of evidence that British firms are struggling to win business abroad, despite the pound’s competitive exchange rate.

UNITED KINGDOM
Industrial production The data on industrial activity has been more than usually volatile of late, so not too much should be read into the increase in manufacturing production of 0.3% reported in May. A more reliable guide to what’s happening is to compare the last three months with the previous three months, on which basis the level of output was up by a robust 2.6%. Over the past year the level of output (again measured across three month periods) has increased by 3.8%, with the engineering, automotive, and metals sectors doing most of the work. The weakening tone of recent surveys, however, suggests that this rate of growth will slow soon.

External trade Hopes that Britain will be able to power its way to a robust export-led recovery are looking ever more forlorn. In May the deficit on the UK’s trade in goods and services widened to £3.8 billion, from April’s £3.5 billion, making it the largest shortfall since July 2008. This deterioration was entirely down to a widening of the deficit on the trade in goods, where the value of exports was barely changed, while the value of imports increased by a further £700 million.

House prices The Halifax survey reported a second fall in average prices in June. May’s decline of 0.5% was followed by a drop of 0.6%, suggesting that the market is now softening as more supply becomes available.

EUROPE
Stress-testing the banks One of the sources of nervousness for the financial markets of late has been the results of stress-tests on 91 banks in the Euro Area, which are due to be reported on 23rd July. It is generally expected that between 10 and 20 institutions could fail these tests, which are being undertaken with reference to a deep double-dip recession scenario. But the markets were heartened this week when it was learnt that holdings of Spanish, Portuguese, and other government debt would not have to be written down to anything like the amount that will have to be assumed for Greek bonds.

Industrial production There was more upbeat news on the industrial front. Whatever the surveys may foreshadow about the months ahead, it looks likely that the Eurozone will post robust (by its standards) growth of more than 0.5% for the second quarter. In particular the great German exporting juggernaut continues to roll on, with industrial output up by 2.6% in May, and the volume of manufacturing production surging by 3.4%, with production of capital goods being especially buoyant. On this basis, Germany’s GDP is set to expand by a brisk 1%-plus in the second quarter. Even France got in on the act, reporting an increase in industrial output in May of 1.7%. Much of this was due to a rebound in energy output, with manufacturing production up by a more modest 0.5%. Nonetheless, compared with the same month of last year, French manufacturers have still been able to raise their output by more than 7%.

UNITED STATES
It was a very quiet week for data releases. But what there was (principally the results of the ISM non-manufacturing survey) reinforced the recent turnaround in the fortunes of the dollar. Not so long ago bad news, even if it related to America, was likely to push the dollar higher as investors’ risk aversion increased and they rushed for cover. This no longer seems to be happening. The dollar has slid gently lower against the euro, being at around $1.27 by Friday morning, its lowest level since the second week of May.

THE WEEK AHEAD…
Monday sees the release of the delayed final estimate of UK economic growth in the first quarter. This press release is usually more one for the economic geeks and doesn’t tend to have much of an impact on financial markets, not least because it comes some three months after the period for which it is reporting. But the fact that it has been delayed for ten days on account of errors means that it will be closely watched. For even if it doesn’t affect the overall rate of GDP growth, there could be substantive changes to some of the components.
Then, on Tuesday, the ONS will release the inflation numbers for June. With petrol prices having fallen this June in contrast to a sizeable increase last June, the annual rate of CPI inflation is expected to ease back to around 3%. If it doesn’t, we’re likely to hear and read more chatter from MPC members as they soften us up for an earlier-than-expected rate rise in the autumn.
Finally, Thursday brings a slew of data from China, including GDP for the second quarter (which they seem able to estimate before any other major economy), along with inflation, industrial production, urban fixed investment, and other data for June. These releases will give a better indication of the extent to which the economy is now cooling from its potentially-overheating state of recent months.

Mon - UK - GDP: final estimate (Q1)

Tue - UK - Consumer price inflation (Jun)
Tue - USA - External trade (Jun)

Wed - UK - Labour market (May/Jun)
Wed - USA - Retail sales (Jun)

Thu - China - GDP (Q2), consumer price inflation (Jun), industrial production (Jun)

Fri - UK - Trade balance (May); Producer prices (Jun)

Renewed fears about weaker global growth took their toll on stockmarkets this week, with the FTSE-100
index sliding to its lowest since last September. Unusually, diminished risk-appetite among investors failed to support the US dollar, perhaps reflecting an exceptionally weak report on US consumer confidence. The euro, by contrast, rose against the pound and the dollar, helped by the results of the ECB’s latest offer of emergency
3-month money on Wednesday: demand for this offer totalled ‘only’ €132 billion – compared to suggestions that over €300 billion might be needed – suggesting that the stresses in eurozone bank funding levels may not be as severe as previously thought.

In the UK, meanwhile MPC member Andrew Sentance – who voted for a rate rise at the June meeting – was interviewed by Reuters and insisted that the new Government’s tough Budget does not remove the need for fiscal tightening. But two other MPC members, Adam Posen and Paul Fisher, made it clear that they felt such
a move would risk stifling the nascent economic recovery. It seems likely, therefore, that Mr. Sentence’s position will remain the minority view for some time yet.

UNITED KINGDOM
Business investment Growth of business investment in the first quarter of 2010 was revised up to 7.8% in
the first quarter of 2010, from the initial estimate of 6.0%. Investment in the manufacturing sector continued
to shrink, however, with spending down by 0.2% on the quarter; by contrast, service sector spending grew by
a robust 11%, while construction sector spending jumped by 37%; in both sectors however, investment is still
well below the levels of two years ago.

Housing market Mortgage approvals were weaker than expected, the Bank of England reporting that the number of loans approved for house purchase in May was virtually unchanged from April at 49,815. House prices likewise seem to have stabilized, the Nationwide index indicating that prices edged up by just 0.1%
during June; as a result, the annual rate of increase eased back to 8.7% from 9.8% in May.

Consumer credit and confidence Credit card lending in May was slightly weaker than in recent months, but this was offset by stronger growth in personal loans. As a result, net consumer credit increased by £331 million, after a net repayment of £114 million in April. Confidence remains relatively weak, however, the GfK/NOP index slipping to -19 in June from -18 in May, its fourth consecutive monthly decline.

UK credit conditions The Bank of England’s Credit Conditions Survey indicated that the availability of credit
to companies rose during the second quarter of 2010, though by a little less than had been expected, with a further small increase expected over the next three months. In the household sector, availability of mortgage credit was reported to have increased slightly, though – as in the previous quarter – it seems that the increase was limited to borrowers with high loan-to-value ratios. Availability of secured credit is expected to decrease during the next three months, the first tightening since the start of 2009. The amount of unsecured credit available to households was reported to be little-changed in the second quarter, with a small increase expected in the coming months.

EUROPE
Inflation The annual rate of consumer price inflation in the Euro Area was a touch lower than expected, according to Eurostat’s preliminary (‘flash’) estimate. Prices rose by 1.4% in the year to June, down from
1.6% in May, ending a run of three straight months of rising inflation.

Bank lending The ECB reported that lending to the private sector was up by 0.2% in the year to May, picking up slightly from April’s annual rate of 0.1%. Lending to business was a little stronger than in recent months, though May’s €18 billion monthly rise still left the annual growth rate in negative territory at -2.1%. Lending
to households meanwhile increased by €9 billion on the month, nudging the annual growth rate up to 2.6%.

Unemployment The Euro Area’s unemployment rate in May was unchanged from April at 10.0%, but in the troubled economies of Europe’s periphery a further deterioration was apparent: unemployment rates continued to rise in Spain, Portugal and Ireland; by contrast, the rate was unchanged in France and Italy, and fell in Germany. The timelier national data from Germany, moreover, showed a further improvement in June as
the jobless total fell by 21,000 (seasonally-adjusted) – the twelfth consecutive monthly fall – leaving the unemployment rate unchanged at 7.7%.

UNITED STATES
Labour market The latest employment figures showed non-farm payrolls falling by 125,000 during June.
This, however, included a big fall in staff employed by the Census Bureau in connection with the census
survey, so a more meaningful figure is the level of private-sector employment: this measure of employment
rose by 83,000 in June and, though not quite as alarming as the headline figure, was still slightly disappointing. The unemployment rate, based on a separate survey, edged down to 9.5% from 9.7% in May.

Consumer confidence The latest Conference Board survey suggested that consumer confidence deteriorated sharply in June, ending a three-month run of improving sentiment. The headline reading was much weaker than expected, falling to 52.9 from 62.7 in May.

Housing market The NAR’s Pending Home Sales index (based on sales agreed and expected to be completed during the next month or two) plunged by a record 30% in May. A decline in sales had been widely anticipated following the expiry of the home-buyer tax credit at the end of April, but the fall was much steeper than expected. The rush to beat the deadline may also account for a stronger-than-expected rise in house price during April, the S&P/Case-Shiller index of prices in 20 major cities showing a seasonally-adjusted monthly gain of 0.4%.

THE WEEK AHEAD…
The dissent of Andrew Sentance, who voted at June’s MPC meeting to raise UK interest rates, means that next week’s meeting will see the same arguments deployed. But doveish comments from other members, including recent remarks by Bank of England Governor Mervyn King, suggest that the majority decision will very likely
be another ‘no change’. The same outcome is likely at the ECB’s policy meeting, which also announces its decision on Thursday. Among next week’s data releases, official industrial production statistics from the UK
and Germany should show continued expansion in manufacturing output, though surveys suggest that the rate of growth may have eased a little.

Mon - EMU/UK - PMI manufacturing survey (Jun)

Tue - USA - ISM manufacturing survey (Jun)

Thu - UK - Industrial production (May); MPC rate decision (no change expected)
Thu - EMU - ECB interest rate decision (no change expected)
Thu - Germany - Industrial production (May);

Fri - France - Industrial production (May);
Fri - UK - Trade balance (May); Producer prices (Jun)

The new Government’s Emergency Budget was delivered on Tuesday afternoon and set out a tough but clear ‘fiscal mandate’ to put the UK public finances on a more sustainable footing. The key aims are to eliminate the structural deficit on the current budget by the end of this Parliament (2014/15), and to start reducing the level of debt by 2016. As expected, roughtly £4 out of every £5 of the deficit reduction comes from spending cuts, though in the short term tax increases will make a bigger contribution. A detailed breakdown of the spending cuts will not be available until the Comprehensive Spending Review (CSR) is published in October, but it seems likely that areas outside of healthcare may see real-terms cuts of around 25% over four years.

After the recent problems of certain heavily-indebted countries in southern Europe, it was significant that ratings agency Fitch broadly endorsed the Budget, saying that the plans “if delivered upon, will materially strengthen confidence in the UK public finances and its AAA status”. This was reflected on the currency markets where sterling rose agains both the dollar and the euro following the Budget announcement. The pound also gained support from the slightly surprising news that, at June’s MPC meeting, Andrew Sentance broke ranks to vote for an immediate rate rise of a quarter of a percentage point. The implication is that UK Bank Rate

Elsewhere, next week also sees the release of new and existing home sales data in the USA. These are likely to show that the housing market is set for a period of renewed weakness following the demise of the home-buyer tax credit at the end of April. May’s existing home sales could see a last hurrah – the tax credit having been gained at the earlier contract signing stage – but new home sales are likely to be much weaker.

UNITED KINGDOM
Retail sales The CBI’s Distributive Trades Survey showed a net balance of 5% of retailers reporting that sales volumes in June were lower than a year ago. This was a modest improvement on May’s unexpectedly weak reading of -18, and relatively strong performances in the grocery and durable goods sectors – mirroring official figures released last week – suggested that the football World Cup had, as expected, boosted sales of food and televisions. But this was offset by weaker sales in other sectors, notably footwear, which left the headline balance still in negative territory for a second consecutive month. Retailers anticipate a further improvement next month, the expected sales balance for July being back in positive territory at +11.

Bank lending The BBA reported that 36,709 mortgages were approved for house purchase during May. This was slightly higher than April’s 35,964 but is still well below the levels of 40,000+ that were reported during the second half of 2009. Net mortgage lending grew by £2.6 billion, up slightly from £1.9 billion in April, though the BBA also noted that mortgage repayments continued to be higher than usual as paying down debt remains a priority for households. Unsecured lending saw a net repayment of £0.1 billion, a small increase in credit card lending being offset by a slightly larger net repayment in personal loans and overdrafts. Lending to businesses meanwhile shrank further, though May’s net fall of £1.3 billion was slightly smaller than the average decline of £1.6 billion over the previous six months.

EUROPE
Germany Business confidence was stronger than expected, the Ifo Business Climate Index edging up to 101.8 in June from 101.5 in May. Responses suggested that current conditions are still favourable, though this was partly offset by a more downbeat view of prospects for the coming months.

France Household spending on manufactured goods was a touch stronger than expected, rising by 0.7% in May. As in the UK, this has been attributed to stronger television sales ahead of the World Cup but, following the outcome of the tournament’s group stages, the boost to sales is likely to prove even more transient than in Britain. Business confidence meanwhile weakened slightly, the official index slipping to 95 in June from 97 in May.

UNITED STATES
Housing market Disappointing figures for sales of new and existing homes have prompted speculation that housing market demand may be weaker than previously thought. New home sales slumped by 32.7% in May to an annualized rate of 300,000 units, the lowest level since the series began in 1963. A decline in sales had been widely anticipated following the expiry of the home-buyer tax credit at the end of April, but the fall was much steeper than expected; moreover, the prior two months’ figures were revised sharply lower, suggesting that the boost from the tax credit was not as great as previously thought. Sales of existing homes meanwhile fell by 2.2% to a 5.66-million annualized rate; this too was something of a disappointment, as previously-agreed contracts had been expected to sustain sales.

Durable goods orders Total durable goods orders fell by 1.1% during May, the first decline in six months. This was mainly due to a big drop in the notoriously volatile aircraft orders component, and the underlying picture was more encouraging: orders excluding transport equipment rose by 0.9%, while non-defence capital goods excluding aircraft (a closely-watched proxy for business investment) were up by 2.1%.

ASIA
Japan Core consumer prices in May were down by 1.2% from a year earlier, after falling by 1.5% in the year to April. This was the fifteenth consecutive month of year-on-year price falls.

THE WEEK AHEAD…
Tue - UK - BOE Mortgage approvals and consumer credit (May)
Tue - USA - S&P/Case-Shiller house price index (April); Consumer confidence (Jun)

Wed - Germany - Unemployment (Jun)
Wed - EMU - Consumer price inflation (Jun, flash estimate)

Thu - Japan - Tankan survey (Q2)
Thu - UK/EMU/USA - PMI manufacturing surveys (Jun)

Fri - EMU - Unemployment (May)
Fri - USA - Non-farm payrolls (Jun)

Re-shaping the future
This month’s ‘Emergency Budget’ was, rightly, trailed as a once-in-generation opportunity for the new Government to shape the future trend of the UK economy for decades to come. As in 1945 and 1979, we had reached the point where tinkering and incremental change was not enough. Radical action was needed from Chancellor Osborne but he had a very difficult balancing act to achieve. As well as shrinking the unsustainable fiscal deficit and controlling the national debt, he had to ensure that the nascent economic recovery stayed on track, as well as putting down a marker for longer-term tax reform and protecting the most vulnerable members of society.

Striking early in the new government’s term was essential. The fiscal mess could still legitimately be attributed to the previous administration, bad news was generally expected, and this government would be able reap the benefit later in the Parliament. After the recent experience of the indebted countries of southern Europe, early action to convince markets of the seriousness of the Government’s intent was the priority.

It is hard to imagine a more challenging agenda for the youngest Chancellor in 120 years in his first job in government. On the day, however, Mr Osborne talked tough – and was tough. He met the key issues of the deficit, national debt, the welfare budget and the public sector head on, yet he could still point to growth forecasts from the independent Office for Budget Responsibility that showed GDP increasing at or above trend rates from 2011 onwards (2.3 %– 2.9%). In addition, the unemployment consequences of the Budget (declining every year to 6.1%, or 1.1 million on the claimant count by 2015) were higher than in Alistair Darling’s final budget yet nowhere near as bad as the pessimists were predicting, while inflationary pressure remain benign.

Eliminating the deficit
A new ‘fiscal mandate’, replacing Gordon Brown’s discredited Fiscal Rules, sets the goal of eliminating the structural deficit on the current budget by 2015-16, and of starting to reduce the public sector debt burden at the same date. The ratio of outstanding debt to GDP will now peak at 70% in 2013-14 rather than the 80% envisaged at a later date by the previous government. And he kept to the pre-election promise of almost £4 of every £5 of the deficit reduction coming from spending cuts rather than tax increases.

Many of the measures had been well trailed in advance. The growth of the public sector will be curbed by a pay freeze (for those earning more than £21,000), and by adjustments to pension schemes in ways to be investigated by former Labour Cabinet minister John Hutton. A range of benefits (tax credits for higher earners, child benefits, housing benefits and disability benefits) were the areas highlighted for the targeted savings of £11 billion by 2014-15. The personal sector will also be making a contribution, most notably with a rise in VAT to 20%. But this will not take effect before next January, by which time the economy should have completed its fifth quarter of recovery. For business, there was the expected bank levy and the increase in capital gains tax, but only to 28% and not 40% as widely predicted.

Yet this fiscal tightening of £40 billion by the end of the Parliament still contained a few small sweeteners. The link between pensions and earnings was re-established, corporation tax (including the small companies rate) was reduced, the personal allowance for income tax was raised, and there were some concessions on Child Tax Credit and employers National Insurance contributions. And just for once the usual duties on tobacco, alcohol and petrol were left untouched although the alcohol question will be revisited later in the year when ways of combating binge drinking are examined. But these were of little consequence. There was the promise of jam tomorrow, however, once the debt issue has been contained.

Areas of uncertainty
There are grey areas, as there always are. Whether exports and investment fill the hole left by consumers and government spending is a big issue, particularly in view of what is happening in the UK’s major market of the EU. But most economists have been arguing that this rebalancing of activity is essential and the forecasts reflect it. The view that inflationary pressures will remain subdued (the target was confirmed as staying at 2% as measured by the CPI) is open to debate but it allowed the Chancellor to say that interest rates were likely to remain at their historically low levels for some time to come.

The Chancellor’s first Budget speech was confidently delivered, broad ranging and spread the pain as widely as he had promised. The poorer young and the poorer old were helped and business (apart from the effect of the VAT increase on retailers) fared better than consumers. The general view is that this is about as bad as it is likely to be and while many aspects of the Budget will be unpopular, Mr Osborne will probably not be back for a second bite. If the recovery gathers momentum as the OBR forecasts suggest, the going should start getting a little easier for Chancellor by the time of his next budget.

Dennis Turner
Chief Economist
HSBC Bank plc

The UK’s Office for Budget Responsibility (OBR) this week released its first economic forecasts. As had been widely predicted, the growth forecast for 2011was cut to 2.6%, a substantial downgrade from the Treasury’s previous forecast of 3.25% in the March Budget – though still slightly above the current HSBC forecast of around 2% growth. At the same time, the OBR trimmed its forecast for public sector borrowing in 2009/10 by £10 billion and by £8 billion in 2010/11. This does not, of course, remove the pressure for fiscal consolidation – underlined this week by the announcement that £12 billion of government spending on a range of projects is to be cancelled or suspended – and the fiscal position may look somewhat different after next Tuesday’s Budget report. The OBR forecasts were well-received by financial markets, however, and helped sterling to gain ground against the dollar.

Sterling also gained support from comments by MPC member Andrew Sentance: in a newspaper article he hinted that, unless the current rate of inflation came down, the Bank of England might be forced to raise interest rates sooner than expected. This week’s data did in fact show that inflation began to soften in May, though the fact that this was partly due to food prices may leave some MPC members still wondering whether this trend is sustainable. Other positive news this week included better-than-expected data for retail sales and claimant unemployment, though in both cases the overall picture was less clear-cut than the headline figures suggested.

UNITED KINGDOM

Inflation Consumer price inflation fell slightly faster than expected in May, the annual rate easing back to 3.4% from 3.7% in April. The main downward contribution came from food and petrol prices, but the ‘core’ rate – which excludes food and energy – also slowed, falling from 3.1% to 2.9%. The RPI inflation rate eased back by slightly less (from 5.3% to 5.1%), reflecting the higher weight of housing costs in this measure.

Retail sales Official retail sales figures for May were slightly stronger than expected, the volume of sales (excluding petrol) rising by 0.5% on the month. The suggestion that consumers might splash out on food and televisions in the run-up to the World Cup was corroborated by relatively strong performances in the grocery and electrical goods sectors, albeit that the latter also reflected heavier discounting. It was not all good news, however: sales in clothing and footwear stores fell by 1.3% on the month; and April’s figures for overall sales, excluding petrol, were revised down to show a monthly decline of 0.1%. In a further sign that inflation is starting to ease, the ‘implied deflator’ (an indicator of year-on-year price changes) slowed to 0.6% from 1.0% in April.

UK labour market Claimant unemployment fell by a further 30,900 in May, following similar declines in March and April. As in previous months, however, the broader picture painted by the Labour Force Survey was less encouraging: although the number of people in work rose by 5,000 during the three months to April, this was entirely due to part-time employment as the number of people in full-time work continued to fall sharply; the modest rise in employment, moreover, was outweighed by an increase in the number of people looking for work, so that the ILO measure of unemployment rose by 23,000. The LFS data also showed a further rise in the already-elevated level of economic inactivity – i.e. people neither in work nor looking for work. Pay growth meanwhile remains subdued, with annual growth of average earnings (excluding bonuses) falling to 1.7% in April from 2.3% in March.

Manufacturing The CBI’s monthly Industrial Trends Survey reported that order books weakened slightly in June, the total orders balance slipping to -23 from -18 in May. The CBI remained fairly sanguine, noting that this did not appreciably reverse the improving trend of recent months. More significant perhaps, given the UK’s disappointing export performance in recent months, was a similar decline in the export orders balance, which slipped from +3 to -2. Output expectations for the next three months remained positive, though the balance eased back slightly from +17 to +15.

Housing market The latest RICS housing market survey was broadly positive, the prices balance rising from +19 in April to +21 in May, its highest reading since January. The survey also reported a sharp increase in new instructions to sell, perhaps boosted by the new Government’s decision to abolish HIPs: responses to a specific question on this topic indicated that RICS members expect this decision to increase the supply of properties by around 15%. Perhaps reflecting this, the price expectations balance eased back slightly from +7 to +5.

Public finances Net borrowing in May was a little lower than expected at £10 billion, and total borrowing for the first two months of the fiscal year was a touch lower than last year at £24.3 billion. But the ratio of debt to GDP continued to edge higher, rising to 62.2 from 61.7%.in April.

EUROPE
Inflation Eurostat confirmed that the annual rate of consumer price inflation across the eurozone edged up to 1.6% in May, from 1.5% in April. ‘Core’ inflation (excluding energy and unprocessed food) remains more subdued, the annual rate ticking up slightly from 0.8% to 0.9%.

Industrial production Industrial production in the Euro Area rose by 0.8% during April: this was a touch above expectations, and meant that output was up by 9.5% from a year earlier – the fastest annual growth since eurozone records began in 1991. April’s figures included strong growth in intermediate and capital goods, but production of consumer goods was weaker, with durable and non-durable goods falling by 0.1% and 1.2% respectively on the month.

Trade Exports from the Euro Area fell by 2.4% (seasonally-adjusted) during April, but this was more than offset by a 3.5% decline in imports. As a result, the monthly trade surplus rose to €1.4 billion from €0.0 billion in March.

UNITED STATES
Inflation A sharp fall in petrol prices (down by over 5% on the month) contributed to overall consumer prices falling by 0.2% during May; this was the biggest monthly decline since December 2008, and brought the annual rate down to 2.0% from 2.2% in April. ‘Core’ prices (excluding food and energy) were also subdued, a monthly rise of 0.1% leaving the annual rate unchanged at a 44-year low of just 0.9%.

Housebuilding New housing starts were weaker than expected, falling by 10 % in May to an annualized rate of 593,000 units; and new building permits, an indicator of future activity, fell by 5.9% to a 574,000-unit annual rate. Industry sentiment also weakened, the NAHB index (a survey where readings above 50 indicate favourable conditions) falling to 17 in June from 22 in May.

Industrial production Manufacturing output rose by a solid 0.9% during May, while the broader measure of industrial production rose by an even stronger 1.2% as air-conditioning units were powered up in response to unusually warm weather. Capacity utilization – a measure that is closely watched by US policymakers – rose to 74.7% from 73.7% in April, though this is still some way below its long-term average.

THE WEEK AHEAD…
The main event in the UK next week will be the new Government’s ‘emergency’ Budget, which will be delivered on Tuesday afternoon. Although the forecasts recently released by the Office for Budget Responsibility suggest, on the face of it, a slightly less alarming outlook for the public finances, it has certainly not lifted the pressure for a substantial fiscal consolidation. And from a political point of view, a new government may be more likely to introduce painful measures at an early stage when the responsibility of the previous administration is most likely to be acknowledged by the electorate. Accordingly, Tuesday’s Budget is expected to live up to its billing by setting out a demanding programme of real-terms spending cuts coupled with some modest tax rises.

Elsewhere, next week also sees the release of new and existing home sales data in the USA. These are likely to show that the housing market is set for a period of renewed weakness following the demise of the home-buyer tax credit at the end of April. May’s existing home sales could see a last hurrah – the tax credit having been gained at the earlier contract signing stage – but new home sales are likely to be much weaker.

Tue - UK -Budget
Tue - Germany - Ifo business climate index (Jun)
Tue - USA - Existing home sales (May)

Wed - UK - MPC minutes (June meeting); CBI distributive trades survey (Jun)
Wed - USA - New home sales (May); FOMC interest rate decision (no change expected)

Thu - USA - Durable goods orders (May)

As the state of the public finances in Britain and Europe continued to exercise financial markets, the pound weakened against the dollar at the start of the week after ratings agency Fitch said that addressing the UK’s deficit would be a “formidable” challenge for the new Government. But strong data from Asia later helped to restore a degree of risk appetite among investors, contributing to a bounce in world stockmarkets and boosting sterling.

With UK policymakers now focusing heavily on the need to reduce the budget deficit, monetary policy has clearly taken a back seat to fiscal policy since the election. As had been universally expected, the Bank of England this week left UK Bank Rate unchanged at 0.5%, and made no changes to the stock of assets acquired under its Quantitative Easing programme. In recent months, policymakers have also emphasised the scope for exports to make a greater contribution to economic growth: as this week’s trade data for April showed (again) however, the lower level of sterling seems not have brought about a meaningful increase in export volumes. This is one of the factors that have prompted HSBC to reduce its forecasts for GDP growth: we now expect the UK economy to grow by 1.2% in 2010 and by just 1.9% next year.

The ECB likewise left its benchmark interest rate on hold this week, but the gap between Euribor interest rates and other money market rates is still unusually wide, suggesting that markets remain concerned about counterparty risk in the region. Despite this, the euro had a good week on the currency markets, helped by positive comments from the chairman of China’s state pension fund, and by a German court decision not to block the German Government’s participation in the €440 billion European Financial Stability Facility.

UNITED KINGDOM
Retail sales The British Retail Consortium (BRC) reported that total sales in May were 3.0% higher than a year earlier, while like-for-like sales were up by 0.8%. This was a considerable improvement on April’s figures (of -0.2% and -2.3% respectively), and was also rather better than had been suggested earlier by the CBI’s distributive trades survey. The BRC said that clothing sales were boosted by warmer weather at the end of the month, but uncertainty about the looming public spending cuts and tax rises meant that consumers were more cautions about ‘big-ticket’ items such as furniture.

Industrial production Official statistics showed that manufacturing output declined by 0.4% during April. This was weaker than expected, but can perhaps be explained as a correction after the strong gains in each of the previous two months; hence the three-month growth rate, which smooths out some of the month-to-month volatility, rose to 2.5% from 1.3% in March. The broader measure of industrial production, which includes energy and utilities, likewise showed a monthly decline of 0.4% in April, with the three-month growth rate picking up to 2.1%.

Producer prices Manufacturers output prices were a touch softer than expected in May, the annual rate of ‘factory gate’ inflation easing down to 5.7% from 5.9% in April. Further up the inflation pipeline, input price inflation (reflecting the annual increase in fuel and raw material costs) also slowed, the annual rate falling from 13.1% to 11.2%.

Trade The goods deficit with the rest of the world was a little wider than expected in April, the shortfall of £7.3 billion being unchanged from March as exports and imports both fell slightly on the month. Excluding oil and erratic items, the underlying picture was little more encouraging, the deficit narrowing slightly as exports posted a monthly gain of 1.1%.

EUROPE
Germany The latest data from the industrial sector were broadly encouraging: industrial output in April was up by 0.9% on the month – not wildly exciting but still a respectable result coming after March’s exceptionally strong increase of 4.0% – while manufacturing orders rose by 2.8%. Exports were a little weaker than expected in April, though the monthly fall of 5.9% is not entirely a disaster after the previous month’s gain of over 10%.

France In contrast to the robust German data, the April figures from France’s industrial sector were more mixed: manufacturing output rose by 0.4% during April, but this was outweighed by a big fall in energy output, with the result that overall industrial production fell by 0.3% on the month. April’s trade figures meanwhile showed modest increases in exports and imports, the monthly deficit narrowing slightly to €4.25 billion in April from €4.41 billion in March.

UNITED STATES
Retail sales The latest retail sales figures were disappointing, with total sales falling by 1.2% during May. The weakness was spread across numerous subsectors, with building materials seeing a particularly sharp monthly fall of over 9%.

Trade balance Exports and imports both fell slightly during April, leaving the monthly trade deficit little changed from March at $40.3 billion,

ASIA
Japan The latest GDP figures were a little better than expected: A downward revision to the initial first-quarter estimate had been widely expected, but the quarterly growth rate was left unchanged at 1.2% as weaker investment was offset by stronger consumer spending. But the data also showed that the GDP deflator – a broad measure of price changes – fell by a record 2.8% from a year earlier, a sign that deflation remains entrenched in the economy.

China Consumer prices were a touch stronger than expected in May, the annual rate climbing to 3.1% from 2.8% in April; the acceleration was largely due to food prices, which rose by 6.1% over the year, while non-food inflation was a more tolerable 1.3%. May’s export figures were also above expectations, the annual growth rate jumping to 48.5%. Other data for May included industrial production and urban fixed-asset investment, where the annual growth rates of 16.5% and 25.9% respectively were a touch slower than in April, though both are still indicative of robust growth.

THE WEEK AHEAD…
One of the first economic policy decisions the UK’s new coalition Government was the creation of the Office for Budget Responsibility (OBR), whose remit is to prepare an independent economic forecast which will frame the Government’s Budget decisions. It is widely thought that OBR’s forecast, due out on Monday, will be less optimistic than the forecasts made by the previous Government; whether this amounts to the Chancellor making a rod for his own back may then become clearer. Other important data out next week include official figures for retail sales and unemployment, which will give some indication of the outlook for consumer spending.

Mon - EMU - Industrial production (Apr)
Mon - UK - OBR economic forecast

Tue - UK - Consumer prices (May); RICS housing market survey (May)

Wed - UK - Labour market (Mar/Apr)
Wed - USA - Housing starts (May); Industrial production (May)

Thu - UK - Retail sales (May): CBI Industrial Trends survey
Thu - USA - Consumer prices (May)

Fri - UK - Public finances (May)

European financial markets remained unsettled this week, reflecting continuing concerns about sovereign debt and the potential impact on the banking sector. The value of overnight deposits held by banks at the ECB hit a record €320 billion on Thursday, surpassing the previous highs of last July, and reflecting growing worries about counterparty risk. But it was not all doom and gloom, and a relatively upbeat PMI report from the service sector suggested that the disruption in financial markets has not yet done significant damage to the real economy.

Apart from a rather mixed set of PMI surveys, the limited UK data out this week were mainly concerned with the housing market. The data were somewhat inconclusive, but if anything suggested that the market is continuing to recover but at a modest pace. The recent announcements concerning possible changes in the capital gains tax regime can only add to the likelihood of increased volatility in the housing market data over the coming months.

Global PMI surveys In the UK, the manufacturing PMI was unchanged in May, holding at the fifteen-year high that it reached in April, although some key subcomponents – including new orders, output and export orders - showed small declines. The service sector PMI was also virtually unchanged, a more disappointing result which suggests that April’s fall was not just a temporary setback caused by volcanic ash. In Europe, by contrast, the manufacturing PMI weakened appreciably, but this was offset by an improvement in the service sector, where the headline reading rose for a ninth consecutive month and the employment component moved into positive territory for the first time since June 2008. The corresponding ISM surveys from the USA still point to a relatively muted recovery in the service sector, where May’s headline reading was unchanged for a second consecutive month.

UNITED KINGDOM
Housing market Bank of England figures showed that the number of mortgage approvals for house purchase rose to 49,871 in April from 49,008 in March: this was a touch stronger than signalled by last week’s BBA figures, but still lower than the average of 53,000 over the previous six months, and suggests that the housing market recovery remains anaemic. The latest house price data were inconclusive, with Halifax reporting that prices declined by 0.4% during May, while Nationwide observed a rise of 0.5%.

Consumer credit The Bank of England also reported that unsecured lending remained subdued, with net consumer credit shrinking by £136 million in April. This was the first net repayment since last November. An increase of £168 million in credit card lending was more than offset by a decline of just over £300 million in overdrafts and personal loans.

Car sales New car registrations in May were up by 13.5% from a year earlier, the eleventh consecutive month of year-on-year growth. The SMMT said, however, that this reflected the weakness of last year’s sales, and noted that May’s figure was still down by nearly 15% from the 2008 level. The SMMT also said that it expects the coming months to be more challenging.

EUROPE
Inflation The annual rate of consumer price inflation in the Eurozone edged slightly higher to 1.6% in May from 1.5% in April, according to the preliminary (‘flash’) estimate. The detailed breakdown is not published until 16 June, but it seems likely that energy-related base effects are partly responsible.

Bank lending The ECB reported that lending to the private sector was up by 0.1% in the year to April, after an annual decline of 0.2% in March. This was thanks to stronger lending to households, where a €17 billion monthly increase lifted the annual growth rate to 2.5%. By contrast, lending to business weakened further, the annual rate of decline falling to -2.6%, from -2.4% in March.

Unemployment The Euro Area’s unemployment rate edged slightly higher in April, climbing to a 12-year high of 10.1%, from 10.0% in March. The troubled economies of Europe’s periphery were worst affected with unemployment rates rising in Italy, Spain, Portugal and Ireland. By contrast, the rate was unchanged in France, and fell in Germany. The timelier national data from Germany, moreover, showed a further improvement in May, with the seasonally-adjusted jobless total falling by 45,000 on the month, and the unemployment rate easing down from 7.8% to 7.7%.

Retail sales April’s retail sales data were much weaker than expected. Sales volumes fell by 1.2% on the month – the biggest monthly fall since last October – and were down by 1.5% from a year earlier

UNITED STATES
Labour market The latest employment figures showed non-farm payrolls rising by 431,000 during May. This unusually big increase was mainly due to the hiring of 400K+ staff by the Census Bureau in connection with the census survey, so a more meaningful figure for May is the level of private-sector employment: this showed a much smaller increase of 41,000 which was considerably less than expected.


THE WEEK AHEAD…
Despite the recent jump in UK inflation rates, Thursday’s meeting of the Monetary Policy Committee is expected to leave UK Bank rate on hold at 0.5%. The dovish tone of May’s inflation report, coupled with the uncertainty about the scale of the coming fiscal squeeze and the impact of events in Europe, should see the MPC remain firmly in wait-and-see mode.

In Europe, the ECB is also expected to leave its benchmark interest rate unchanged, but the subsequent press conference may be a little more interesting. At last month’s conference, the ECB appeared remarkably sanguine about the Euro Area’s sovereign debt problems, but only a few days later it had started to buy government debt. ECB officials are therefore likely to face searching questioning about the amount of debt that it is prepared to purchase, how those purchases will be managed, and the potential impact on the real economy arising from the renewed stresses in financial markets.

Tue - Germany - Industrial production (Apr)

Wed - UK - Trade balance (Apr)

Thu - UK - MPC interest rate decision (no change expected)
Thu - EMU - ECB interest rate decision (no change expected)

Fri - UK - Industrial production (Apr); Producer prices (Apr)
Fri - China - Consumer prices (May); Industrial production (May); Investment (May)
Fri - USA - Retail sales (May)

Markets began the week in a jittery mood after the Bank of Spain was forced to take over CajaSur, a small regional savings bank in Cordoba. Although CajaSur holds only 0.6% of the assets of the Spanish financial sector, it is thought that many of the country’s 45 savings banks are struggling with high levels of bad loans following the slump in the domestic housing market and a prolonged recession. Concerns about the health of Europe’s financial sector were reflected in the money markets, where the three-month dollar Libor rate diverged further from the equivalent euro rate, while on the foreign exchanges the euro came within a whisker of last week’s four-year low against the dollar.

Added pressure on the single currency came from a newspaper report suggesting that China was reviewing its policy of diversifying its dollar holdings into the euro, which has been a big support for the single currency in recent years. Later on Thursday, however, the euro recovered some ground after China issued a statement denying the report, and Spain’s parliament approved the latest austerity package, albeit by just one vote.

Fiscal tightening was also on the agenda in the UK, where Chancellor George Osborne provided details of the additional £6 billion of savings that the new Government intends to make during the current financial year. Bigger cuts, accompanied by tax rises, are certain to follow in the emergency Budget scheduled for 22 June, a prospect which has doubtless contributed to a deterioration in consumer confidence which was among this week’s data releases.

UNITED KINGDOM
Growth The second estimate of first-quarter GDP saw the quarterly growth rate revised slightly higher to 0.3%, from the first estimate of 0.2%. This was in line with expectations following the earlier release of stronger industrial production figures, but other details in the latest release were less encouraging: service sector growth was a rather subdued 0.2% (unchanged from the initial estimate), while household spending was flat on the quarter – presumably affected by the VAT increase at the start of the year. Most troubling perhaps was the failure of exports to achieve any growth, suggesting that the rebalancing of activity away from domestic demand remains elusive. Indeed, with exports stagnating and imports rising, net trade made a negative contribution to first-quarter growth.

Retail sales Activity on the high street suffered an unexpected downturn in May according to the CBI Distributive Trades Survey. A balance of 18% of retailers reported that sales volumes were lower than a year ago, compared to a positive balance (i.e. higher sales) of +13% in April. This represented the biggest one-month drop in the headline reading since January 2005 and, despite the prospect a boost from the soccer World Cup, retailers were hardly more optimistic about prospects for June, the expected sales balance falling to -15, its lowest since August last year.

Consumer confidence The GfK index of consumer confidence weakened for a third consecutive month, the headline reading slipping to -18 in May from -16 in April.

Bank lending The BBA reported that 35,729 mortgages were approved for house purchase during April. This was only slightly higher than March, and still well below the levels of 40,000+ that were reported during the second half of 2009. The BBA figures also suggest that paying down debt remains a priority for households, with higher-than-usual mortgage repayments meaning that net mortgage lending grew by just £1.8 billion in April, the lowest monthly figure since February 2001. Unsecured lending saw a net repayment of £0.3 billion, a small increase in credit card lending being offset by a bigger net repayment in personal loans and overdrafts. Lending to businesses meanwhile shrank further, though April’s net fall of £1.1 billion was a little smaller than the average decline of £1.6 billion over the previous six months.

EUROPE
Germany The GfK index of consumer confidence slipped to 3.5 in June, from 3.7% in May. Germany’s participation in the Greek rescue package, far from prompting an unseemly display of schadenfreude, appears to have induced a growing angst among the burghers of middle Europe, and the survey’s ‘economic expectations’ component slumped from 22.5 to 3.9.

France The consumer environment deteriorated somewhat in France too, with household spending on manufactured goods falling by 1.2% during April, while the headline index of consumer confidence slipped to -38 in May from -37 in April. Business confidence held up better, the official index edging up from 96 to 97, just below its long-term average of 100.

UNITED STATES
Growth The second estimate of first-quarter GDP was a touch weaker than expected, the quarterly growth rate being 0.8%. This was essentially unchanged from the initial estimate, but expressed on an annualized basis (as shown in the BEA’s official release) was fractionally lower at 3.0% compared to the initial estimate of 3.2%.

Housing market Sales of new and existing homes both rose sharply in April as buyers rushed to beat the expiry of government tax incentives. Sales of existing homes rose by 7.6% on the month to an annualized rate of 5.77 million units, while new home sales jumped by nearly 15% to a 504,000-unit annual rate. To qualify for the tax credit, buyers needed to sign contracts by 30 April, and must close on the deal by the end of June: with many transactions clearly having been brought forward to beat these deadlines, these elevated levels of activity are unlikely to be sustained. Meanwhile, the S&P/Case-Shiller index of house prices in 20 major cities was up by 2.3% over the year to March, after an annual rise of 0.7% in February; but the recent monthly movements are less encouraging, the seasonally-adjusted figures showing prices flat in March after the previous month’s 0.1% decline.

Consumer confidence Doubts about the housing market seem not to have impinged on consumer confidence. The Conference Board’s index rose for a third consecutive month, the headline reading climbing from 57.7 in April to 63.3 in May, its highest for over two years.

Durable goods orders A surge in aircraft orders meant that total orders were stronger than expected in April, rising by 2.9% on the month. The underlying picture was less clear-cut: orders excluding transport equipment fell by 1.0%, while non-defence capital goods excluding aircraft (a closely-watched proxy for business investment) fell by 2.4%; in both cases, however, these followed very strong gains in the previous two months, which were only partly reversed by April’s declines.

ASIA
Japan Inflation and unemployment data were a touch weaker than expected. The annual rate of deflation accelerated in April, with core consumer prices showing a decline of 1.5% from a year earlier. This was the fourteenth consecutive month of year-on-year price falls, and followed a decline of 1.2% in March. The unemployment rate meanwhile edged up to 5.1% from 5.0% in March.


THE WEEK AHEAD…
Recent turmoil in the financial markets and the wrangling over the Greek rescue package seem to have had a relatively limited impact – so far – on the real economy. But the advance ‘flash’ reading of the Eurozone composite PMI showed a deterioration in May, as did the German Ifo survey. The detailed results of the PMI surveys for the Eurozone and elsewhere will shed further light on the resilience, or otherwise, of business activity. In the USA, next week’s key release is the employment data for May, although the waters have been muddied by the effects of the census. With some 635,000 people having been hired for follow-up enquiries, the best guide to the underlying employment trend will be private sector non-farm payrolls, which are expected to have increased by a further 220,000.

In the UK, Wednesday’s release of lending and mortgage data for April by the Bank of England is expected to confirm the softening trend in housing market activity indicated by the less complete figures from the BBA. The number of loans approved for house purchase is likely to fall slightly from March’s 49.4K, which compares with levels of 50-55K in the closing months of last year.

Mon - EMU - Consumer prices (May, ‘flash’ estimate)

Tue - UK/EMU/USA - PMI/ISM manufacturing surveys (May)
Tue - Germany - Unemployment (May)

Wed - UK - Mortgage approvals and consumer credit (Apr)

Thu - UK/EMU/USA - PMI/ISM service sector surveys (May)

Fri - EMU - GDP (Q1, 2nd estimate)
Fri - USA - Non-farm payrolls (May)

Stockmarkets in the USA, Europe and Asia all fell sharply on Thursday as nervous investors opted
for the perceived ‘safe havens’ of US and German government bonds. The heightened mood of risk-aversion was partly driven by developments in the USA, where the Senate passed a Bill providing for the most sweeping overhaul of financial regulation since the 1930s. The Bill’s key points include: creating a new regulatory watchdog; restraints on the activities of financial institutions; and new arrangements for the government to take control of institutions deemed to be at risk. For many investors, though, the perception seems to be that a reduction in risk-taking will probably involve a reduction in profitability.

In Europe, Germany announced a partial ban on short-selling in certain key markets, including shares of the country’s ten largest banks, Euro-denominated government bonds, and credit-default swaps based on those bonds. The measure, which was imposed unilaterally by the German government, did not receive wholehearted support from Germany’s EU partners and has added to the sense that there is a lack of cohesion among European policymakers. Meanwhile, Germany’s lower house approved the country’s contribution the €750 billion euro rescue package for Greece. But, with two opposition parties abstaining and one voting against, it was hardly a convincing victory for Chancellor Angela Merkel: and without cross-party support, her Government will likely struggle to secure wider public backing for bailing out Germany’s neighbours.

In the UK meanwhile, the minutes of May’s MPC meeting showed that the decision to leave UK Bank Rate unchanged was, as expected, unanimous. This was followed by April’s inflation figures, which were rather higher than expected. But the ensuing exchange of correspondence between Mervyn King and the new Chancellor George Osborne suggested that the MPC will continue to ‘look through’ what it perceives to be a temporary spike in inflation.

UNITED KINGDOM
Inflation Consumer price inflation was again higher than expected in April, the annual rate rising further to 3.7% from 3.4% in March. In contrast to previous months, this latest increase was not primarily driven by energy costs, with official statisticians pointing to a particularly strong upward effect from ladies’ clothing. As a result, the ‘core’ rate, excluding energy and food, edged up from 3.0% to 3.1%. The RPI measure of inflation also came in higher than expected, the annual rate jumping to 5.3%, its highest since July 1991.

Retail sales Official retail sales figures were slightly stronger than expected, the volume of sales (excluding petrol) rising by 0.1% in April. Sector performance was mixed, with food sales still weak while solid rises of around 2% were seen in department stores and clothing stores. Prices seem to have been a little firmer in April (the main upward pressure, mirroring the inflation figures, coming from clothing), and the ‘implied deflator’ (an indicator of year-on-year price changes) rose to 1.0% from 0.7% in March. Compared with a year earlier, sales were up by 3.0%, slightly lower than March’s annual rate of 3.4%.

Manufacturing The CBI’s monthly Industrial Trends Survey reported that export orders improved sharply in May, the balance rising to +3 from -16 in April; this was the first positive balance (indicating that orders are higher than usual) since March 2008. Domestic orders, though still below normal, also improved, the balance rising from -36 to -18. More manufacturers intend to increase production in the coming months, the output expectations balance rising from +14 to +17.

Public finances Net borrowing in April was £10 billion - lower than expected, but still the highest April figure on record (up from £8.8 billion in the same month of last year). Strong revenues in April, some of which are deemed by the statisticians to accrue in the previous month, meant that borrowing in the fiscal year 2009/10 was revised down by £7.5 billion to £145.4 billion. Meanwhile, the ratio of debt to GDP continued to edge higher, reaching 62.1%.

Business investment Official statistics reported the first quarterly rise in business investment for nearly two years, as spending rose by 6.0% during the first three months of 2010 (though spending was still down by 11.0% from a year earlier). The first quarter’s increase was largely driven by an 8% rise in service sector investment, while construction investment also grew strongly. In the manufacturing sector, however, investment declined by a further 0.9% in the first quarter and was down by nearly 30% from a year earlier.

EUROPE
Germany New GDP data confirmed that the German economy expanded by 0.2% in the first quarter of 2010. But the details showed that the growth was entirely due to rebuilding of inventories, while household spending fell. Business sentiment meanwhile turned slightly more cautious, the Ifo Business Climate Index edging down fractionally to 101.5 in May from 101.6 April; although the survey suggested that current conditions are still favourable, this was offset by a more downbeat view of prospects for the coming months.

UNITED STATES
Inflation Consumer prices in April were weaker than expected, with overall prices falling by 0.1% on the month, while ‘core’ prices (excluding food and energy) were flat. On annual basis, this brought the headline inflation rate down to 2.2%, while the core rate slowed to a 44-year low of just 0.9%. Further up the inflation pipeline, producer prices were also relatively subdued, with overall prices rising by 0.1% on the month and core prices by 0.2%.

Housebuilding New housing starts rose by 5.8% in April to an annualized rate of 672,000 units, the highest since October 2008. But new building permits, an indicator of future activity, were much weaker, dropping by 11.5% to a 606,000-unit annual rate.

ASIA
Japan GDP expanded by 1.2% in the first quarter of 2010, broadly in line with expectations and comfortably outpacing growth in the USA, the UK and the Euro Area. Growth is, however, still heavily dependent on exports, which were up by nearly 7%. By contrast, consumer spending growth was slightly disappointing, the rise of just 0.3% suggesting that the boost from government stimulus measures may be starting to fade.

THE WEEK AHEAD…
This week’s mixed figures for US housing starts and building permits suggest that the recovery in the American housing market may struggle to maintain traction following the expiry of home-buyer tax credits at the end of April. Next week’s figures for sales of new and existing homes may shed some light on the outlook there. In the UK meanwhile, the strength of recent data from the manufacturing sector suggest that the second estimate of GDP (out on Tuesday) is likely to see first-quarter growth revised up slightly to 0.3%.

Mon - USA - Existing home sales (Apr)

Tue - UK - GDP (Q1, 2nd estimate); BBA mortgage lending (Apr)
Tue - USA - S&P/CaseShiller house price index (Mar); Consumer confidence (May)

Wed - USA - Durable goods orders (Apr); New home sales (Apr)

Thu - UK - CBI distributive trades survey (May)
Thu - USA - GDP (Q1, 2nd estimate); BBA mortgage lending (Apr)

Fri - UK - GfK consumer confidence (May)

David Cameron was this week installed as Britain’s new Prime Minister after the Conservatives and the Liberal Democrats agreed to form a coalition government. The news was positive for sterling, with the pound rising to $1.5 against the US dollar during Tuesday’s trading. By the end of the week, however, some of the euphoria had worn off, as nervousness about the viability of coalition government were accompanied by mixed economic data. Some key policies of the new Government have already been agreed, including accelerated action to cut the government deficit through £6 billion of additional cuts in the current fiscal year.

Against this background, the Bank of England this week left UK Bank Rate unchanged at 0.5%, and delivered its quarterly Inflation Report, which was broadly similar in tone to February’s report: in particular, it showed inflation still undershooting the 2% target at the two-year horizon. Inevitably, the discussion was dominated by the fiscal outlook: although the latest forecast was based on fiscal plans outlined in Alistair Darling’s March Budget, Governor Mervyn King said that he had received information on the fiscal plans of the new Government, which he described as a “very strong and powerful agreement”.

The Government has said that it will deliver a revised Budget within fifty days of taking office, and it seems certain that fiscal policy will be tightened, and tightened faster than previously anticipated. While the relationship between fiscal and monetary policy is not clear-cut, this is one of the factors that has prompted HSBC to revise its interest rate forecast. We now expect no change for the remainder of this year, with a gradual tightening during next year taking UK Bank Rate to 2.5% by the end of 2011.

UNITED KINGDOM
Industrial production Official statistics showed that manufacturing output jumped by 2.3% during March. This was stronger than expected, and is consistent with the more positive tone of recent business surveys. As a result, output in the first three months of the year was up by 1.2% from the previous quarter, as was the broader measure of industrial production. All else being equal, this implies that first-quarter GDP growth will be revised up from 0.2% to 0.3%.

Retail sales The British Retail Consortium (BRC) reported that total sales in April were 0.2% lower than a year earlier, while like-for-like sales were down by 2.3%. These were considerably weaker than March’s figures (of +6.6% and +4.4% respectively), but the deterioration was partly due to the earlier timing of Easter this year, which meant that much of the seasonal spending was brought forward to March at the expense of April. The BRC also suggested that pre-election uncertainty had prompted consumers to favour essentials and replacements over discretionary purchases.

Labour market Claimant unemployment data were better than expected, falling by 27,100 in April. But separate figures from the Labour Force Survey were – again – less encouraging: these showed that ILO unemployment rose by 53,000 during the three months to March, while the number of people in work fell by 76,000. Headline pay growth, based on the latest three months, meanwhile jumped to an annual rate of 4.0%: this was largely bonus-related, reflecting the weakness of payments a year earlier and, perhaps, some of this year’s bonuses being paid earlier in order to avoid tax rises; but ‘regular’ pay growth is also recovering, the annual rate showing a more modest rise to 1.9% from 1.7% in March.

Housing market April’s RICS survey pointed to an across-the-board rebound in sentiment, the prices balance rising to +17 from +9 in March. The new buyer enquiries balance meanwhile rose from +1 to +8, and the average number of completed sales rose by 1.5% on the month to 17.4 per surveyor. Respondents were also more optimistic about the outlook: the sales expectations balance rose to its highest since last October, while the price expectations balance moved up into positive territory, rising from -2 to +7.

Trade The goods deficit with the rest of the world unexpectedly widened to £7.5 billion in March from £6.3 billion in February. This was mainly due to a surge in imports, which jumped by over 5% on the month while exports saw a more modest 1% gain.

EUROPE
GDP The preliminary estimate of Euro Area GDP indicated that the economy expanded by a modest 0.2% during the first quarter of 2010, broadly in line with expectations. Most major economies experienced similarly muted growth, including Germany (0.2%), France (0.1%), and The Netherlands (0.2%). Unusually, Italy was a relative outperformer with quarterly growth of 0.5%, though this is likely to be partly a correction after a surprisingly weak performance in the fin al quarter of last year. Spain finally managed to crawl out of recession with growth of 0.1%.

Industrial production Industrial production figures were stronger than expected, with output across the eurozone rising by 1.3% during March. This left output up by 6.9% from a year earlier, the highest annual growth rate since May 2000.its highest since April 2008. Capital goods was again the best performing subsector, with output up by 1.5% on the month.

UNITED STATES
Retail sales April’s retail sales were a little stronger than expected, rising by 0.4% on the month. Moreover, March’s increase was revised up from an already-impressive 1.9% to show a jump of 2.1%.

Trade balance Exports and imports both rose by around 3% in March, causing the trade deficit to widen a little further to $40.4 billion from $39.4 billion in February. The wider deficit was due to oil, reflecting increases in both the price and the volume of imports.

CHINA
Consumer prices were a touch stronger than expected in April, the annual rate climbing to 2.8% from 2.4% in March; the acceleration was largely due to food prices, which rose by 5.9% over the year, while non-food inflation was a more sedate 1.3%. Other data for April included industrial production and urban fixed-asset investment, where the annual growth rates (at 17.8% and 26.1% respectively) were a touch slower than in March, though both are still running at relatively high levels.

THE WEEK AHEAD…
Although this week’s Inflation Report painted a fairly benign picture of the inflation outlook, the minutes of recent MPC meetings suggest that there is still a niggling worry about inflation among some members of the Committee. Next week’s inflation figures are unlikely to dispel those concerns, with higher petrol prices helping to keep annual CPI inflation above the 3% target ceiling.

Tue - UK - Consumer prices (Apr)
Tue - USA - Housing starts (Apr)

Wed - UK - Minutes of May MPC meeting
Wed - USA - Consumer prices (Apr); FOMC minutes of April meeting

Thu - UK - Retail sales (Apr)
Thu - Japan - GDP (Q1, preliminary estimate)

Fri - UK - Public finances (Apr)
Fri - Germany - Ifo survey (May)

Thursday’s general election in the UK was the closest for decades, the Conservatives winning the most seats but falling short of the number required to enjoy an overall majority. Although the result was not entirely a surprise, the heightened uncertainty generated by a hung parliament (the first since 1974) put sterling under pressure, the pound falling to as low as $1.46 against the US dollar and below €1.15 against the beleaguered euro on Friday. The reaction of financial markets in large part reflects concern over a potential lack of clarity with regard to the outlook for public finances. That concern is arguably a touch overdone, as the pressure for fiscal consolidation is such that some workable plan is likely to emerge regardless of the political structure.

Meanwhile, concerns about Greece’s public finances continued to undermine market sentiment regarding the euro. Last weekend’s announcement of a €110 billion rescue package, agreed after much haggling between Greece, other Eurozone governments, and the IMF, brought little respite from the turmoil. Greece has agreed to tough fiscal tightening measures and further structural reforms, but in some quarters there a degree of scepticism about whether Greece will be able to implement the latest austerity measures. Those doubts were underscored by the ugly scenes in Athens this week as anti-government rioting led to several deaths and widespread damage to property.

Global PMI surveys In the UK, the manufacturing PMI rose for a fifth consecutive month in April, reaching its highest since September 1994; the export orders reading hit a new record high, suggesting that the weaker pound is helping exporters (though these readings have not yet been matched by official trade statistics). The service sector PMI unexpectedly slipped back a little, perhaps due to the effect of volcanic ash on the travel sector, but still points to steady growth. In the Euro Area, the headline readings for manufacturing and services both rose, suggesting minimal impact from volcanic ash and the fallout from events in Greece: in particular, Germany’s manufacturing activity expanded at its fastest rate in the survey’s 14-year history. The corresponding ISM surveys from the USA meanwhile showed manufacturing growth rising to its fastest in six years, but the service sector reading was unchanged from March.

UNITED KINGDOM
Housing market Mortgage lending was weaker than expected, the Bank of England reporting that net lending grew by only £318 million in March. This might be a delayed effect of weaker activity in January (due to heavy snow and the ending of stamp duty relief at the start of the year), but the rather modest increase in mortgage approvals (to 48,900 from 46,880 in February), which was in line with figures reported last week by the BBA, suggests that underlying demand remains relatively subdued. House prices were also a touch weaker than expected, the Halifax index showing a marginal decline of 0.1% in April; despite this, the annual rate rose to 6.6% from 4.9% in March.

Consumer credit Net consumer credit meanwhile grew by £0.3 billion in March, down from £0.6 billion in February but a little higher than the average of £0.1 billion over the previous six months. As in previous months, credit card lending accounted for most of the increase in net consumer credit.

Producer prices Manufacturers’ output prices were firmer than expected in April, the annual rate of ‘factory gate’ inflation rising to 5.7% from 5.0% in March. Further up the inflation pipeline, input prices (fuel and raw materials) rose at an annual rate of 13.1%, up from 10.3% in the previous month. Both rates were the highest since October 2008, indicating the potential impact of the weaker pound.

Insolvencies The number of personal insolvencies in England and Wales rose to a new record high of 35,682 in the first quarter of 2010, an increase of 18% from the corresponding period of last year. The corresponding indicator for businesses was a little more encouraging, the first-quarter total of 4,196 company liquidations being 18% lower than a year earlier.

EUROPE
Euro Area Retail sales in the eurozone remained subdued in March, the volume of sales being flat on the month and down by 0.1% from a year earlier.

Germany The latest data from Germany’s industrial sector were highly encouraging: industrial output in March was up by 4.0% on the month, while manufacturing orders jumped by 5.0%.

France The trade deficit widened unexpectedly to €4.7 billion in March from €3.6 billion in February, as a big rise in imports outpaced more modest growth in exports.

UNITED STATES
Labour market The latest employment figures were somewhat stronger than expected, with non-farm payrolls rising by 290,000 during April. But the unemployment rate, based on a separate survey, rose from 9.7% to 9.9%.

THE WEEK AHEAD…
May’s interest rate decision will be announced by the Bank of England on Monday, having been held over from this week due to the general election. The heightened uncertainty which follows the result of a hung parliament means that a change in policy at this stage is highly unlikely. Of greater interest will be the Bank’s quarterly inflation report (out on Wednesday): the minutes of April’s MPC meeting hinted at a higher level of unease about inflation, but on balance the report is unlikely to signal a policy change in the near term.

Mon - UK - MPC interest rate decision: no change expected

Tue - UK - Industrial production (Mar); RICS housing market survey (Apr)
Tue - China - Consumer prices (Apr); Industrial production (Apr); Investment (Apr)

Wed - EMU - GDP (Q1, preliminary estimate)
Wed - UK - Labour market (Mar/Apr); BoE Inflation Report

Thu - UK - Trade balance (Mar)

Fri - USA - Retail sales (Apr); Industrial production (Apr)

Last Friday’s announcement that Greece had requested activation of the EU/IMF aid package did not bring immediate relief for the beleaguered euro. On the contrary, the bad news continued to flow as ratings agency Standard & Poors cut its rating on Greek government debt by three notches to just ‘BB+’, which means that they are now classed as ‘junk’ rather than investment-grade assets. With investors taking fright, the yield on Greece’s five-year debt surged into double figures, while that for two-year debt approached 20%. For good measure, S&P also downgraded its ratings for Portugal and Spain, though not to the same extent. All this took its toll on the euro, which on Wednesday fell to a one-year low of under $1.32 against the dollar.

Meanwhile, the obvious (and perhaps understandable) resistance among the German public to paying for the bail-out forced German Chancellor Angela Merkel to insist on tough conditions that Greece must abide by before any money is released. By Friday, however, it appeared that talks had made more progress, and expectations that a deal may be announced within days, perhaps over the weekend, lent support to the euro.

UNITED KINGDOM
Retail sales The CBI Distributive Trades Survey showed a balance of +13% of retailers reporting higher sales in April compared with last year, unchanged from March and broadly in line with expectations. The strongest growth was in groceries, footwear, and durable household goods, the latter benefiting from the recent improvement in the housing market. After a period of considerable volatility at the start of the year, a reading of +17 on the expected sales balance for May suggests that sales activity has steadied.

Consumer confidence Consumer sentiment weakened slightly in April, perhaps reflecting heightened uncertainty ahead of the coming general election. The headline GfK index eased back to -16 from -15 in March, while the index relating to willingness to make a major purchase fell from -17 to -20, its lowest since last August.

Housing market The Nationwide index of house prices rose by 1.0% during April, pushing up the annual rate of increase to 10.5%. This was the first time since June 2007 that the index has shown double-digit house price inflation, though this partly reflects the weakness of prices in April last year. Separate figures from the BBA showed that the number of mortgages approved for house purchase rose from 33,360 in February to 34,900 in March. The increase was a little less than expected, however, and March’s figure was still well below the average of 40,400 over the previous six months.

Bank lending The BBA figures also showed that mortgage lending, consumer credit, and lending to businesses all remained weak in March: net mortgage lending grew by only £2.4 billion, down from £2.7 billion in February, while unsecured lending saw a net repayment of £0.1 billion; lending to businesses meanwhile shrank further, the net fall of £3.0 billion being rather larger than the average decline of £1.7 billion over the previous six months.

EUROPE
Euro Area The ECB reported that lending to the private sector was down by 0.2% in the year to March, slightly better than February’s 0.4% decline. Within this, lending to households accelerated (mortgage lending in particular) but lending to businesses was weaker, the annual decline of 2.4% being unchanged from February. Meanwhile, Eurostat’s preliminary estimate of consumer price inflation showed that prices across the eurozone rose by 1.5% in the year to April, slightly up from March’s rate of 1.4%. Eurostat also reported that the unemployment rate held steady at 10.0% in March, though the monthly increase in the number of unemployed (up 101,000) was the biggest since last September.

Germany Labour market data were once again markedly better than expected, with unemployment falling for a fifth consecutive month. The number of people out of work fell by a hefty 68,000 in April, the biggest monthly fall since early 2008, bringing the unemployment rate down to 7.8% from 8.0% in March.

France The optimism engendered by last week’s strong household spending figures was dampened by an unexpected decline in consumer confidence, the official index sliding to -37 in April from -34 in March. That was the third consecutive decline, and casts a slight shadow over the prospects for consumer spending and growth in the coming months.

UNITED STATES
Growth The preliminary estimate of GDP indicated that the economy grew by 0.8% during the first three months of 2010, which was in line with expectations.

Housing market The S&P/Case-Shiller index of house prices in 20 major cities was up by 0.6% over the year to February. This was an improvement from January’s reading of -0.7%, and the first time that house price inflation has been in positive territory since January 2007.

Consumer confidence The Conference Board’s confidence index rose to 57.9 in April from 52.3 in March. This was better than expected, and the highest since the collapse of Lehman Brothers in September 2008. The improvement appeared to be largely driven by a more optimistic view of trends in the labour market.

ASIA
Japan Core consumer prices in March were down by 1.2% from a year earlier: this was unchanged from February’s annual rate, and was the thirteenth consecutive month of year-on-year price falls. Other data for March were slightly weaker than expected, with industrial production expanding by 0.3%, while the unemployment rate rose from 4.9% to 5.0%

THE WEEK AHEAD…
With more details of the EU rescue plan for Greece expected to be unveiled over the weekend, concerns about government finances (in Greece and elsewhere) will again occupy centre stage next week. Meanwhile, the regular PMI/ISM surveys will give some indication about the pace of economic recovery in the world’s major economies. In the USA, the non-farm payrolls data are expected to show another reasonably solid rise in employment levels.

Mon - EMU/USA - PMI/ISM manufacturing survey (Apr)

Tue - UK - PMI manufacturing survey (Apr); Lending to households (Mar)

Wed - EMU/USA - PMI/ISM services survey (Apr)

Thu - UK - PMI services survey (Apr)
Thu - EMU - ECB interest rate decision – no change expected

Fri - Germany - Industrial production (Mar)
Fri - USA - Non-farm payrolls (Apr)

Opinion polls in the UK suggest that in Thursday evening’s televised debate between the leaders of the three main parties, the strongest performer was the Liberal Democrat Nick Clegg. If translated into votes in the forthcoming general election, this would add to the risk of a hung parliament, a perception which put sterling under pressure on Friday. It is still early days however, and with two more televised debates to come (on 22 and 29 April) it is very much a game of three halves.

The euro also had something of a roller-coaster ride on the money markets this week, initially being buoyed up by the announcement last weekend of details of an European rescue package for Greece. Broadly, the plan calls for eurozone governments to provide up to €30 billion of bilateral loans in the first year of a three-year programme at an interest rate of around 5%, which would be considerably lower than Greece would have to pay if borrowing at market rates. By the end of the week, however, the euphoria had worn off, and concerns about potential problems elsewhere were also re-surfacing: in particular, the European Commission that Portugal’s plans to address its deficit were based on “somewhat favourable” assumptions concerning future economic growth.

UNITED KINGDOM
Retail sales The British Retail Consortium (BRC) reported that total sales in March were up by 6.6% from a year earlier, while like-for-like sales were up by 4.4%. This was an improvement on February’s figures (of +4.5% and +2.2% respectively), and the best total sales growth since April 2006. But the stronger performance was partly due to this year’s earlier Easter, resulting in much of the seasonal spending, which fell in April last year, being brought forward into March. The BRC said that without this distorting effect, sales growth would have been only half as strong.

Housing market In the RICS housing market survey for March, a balance of +9% of respondents reported rising prices. A positive balance implies that prices are still rising, though the lower reading – down from +18 in February and +30 in January – suggests that the rate of increase has slowed. Consistent with this, the survey also suggested that the imbalance between supply and demand (a contributory factor behind the recent strength of prices) is easing: the new buyer enquiries balance fell from +7 to zero, while the balance for new instructions to sell rose from +16 to +21 – its highest since May 2007.

Trade balance Goods exports jumped by 9.5% in February, suggesting that January’s weakness was a weather-related blip. With imports broadly flat, the monthly goods deficit with the rest of the world narrowed sharply from £8.2 billion to £6.2 billion.

EUROPE
Industrial production February’s industrial production figures were stronger than expected, with output across the eurozone rising by 0.9% on the month. This, combined with steep falls a year ago, took the annual growth rate to 4.1%, its highest since April 2008. February’s figures also showed an uneven performance by sector, with growth driven mainly by capital goods; by contrast, output of consumer durable goods was down by 0.6% on the month, suggesting that demand from the household sector remains subdued.

Inflation The headline rate of consumer price inflation rose sharply from 0.9% in February to 1.4% in March (though this was slightly lower than Eurostat’s initial estimate of 1.5%). This was largely energy-related and ‘core’ inflation – which excludes energy and food – was more subdued, edging up very slightly to 1.0%, where it remains close to its record low. Ireland is still experiencing negative inflation (the annual rate being unchanged from the previous two months at -2.4%), as are two members of the wider EU-27 group, namely Latvia and Lithuania.

UNITED STATES
Industrial production The manufacturing sector enjoyed further robust growth in March, with output rising by a solid 0.9% on the month. Capacity utilization (a measure that is closely watched by US policymakers) rose for a ninth consecutive month, edging up to 73.2 from 73.0 in February, though this is still some way below its long-term average. Meanwhile, lower energy demand meant that overall industrial production rose by only 0.1% during March.

Retail sales Total retail sales rose by an impressive 1.6% during March, boosted by a 6.7% jump in car sales. Underlying sales (excluding cards) were also reasonably resilient, rising by 0.6% after the previous month’s 1.0% rise.

Inflation Inflationary pressures remain relatively muted. Overall consumer prices edged up by 0.1% during March, nudging the annual rate of inflation up slightly to 2.3%. ‘Core’ prices (excluding food and energy) were unchanged on the month, which brought the annual rate down to 1.1%, its lowest since January 2004.

Trade balance The trade deficit widened to $39.7 billion in March, from $39.0 billion in February. This was mainly due to a 1.7% rise in imports, while exports eked out a 0.2% gain. The bilateral deficit with China, however, narrowed from $18.3 billion to $16.5 billion, its lowest in nearly a year. This could take some of the pressure off China to allow its currency to appreciate against the dollar.

ASIA
China GDP in the first three months of 2010 was stronger than expected, the annual growth rate accelerating to a two-year high of 11.9%, from 10.7% in the final quarter of last year. Other data released this week also suggested that China’s economy continues to grow strongly, with industrial production in March up by 18.1% from a year earlier, while urban fixed asset investment in the first quarter was up by 26.4% from last year. Consumer prices were a touch softer than expected in March, however, the annual rate easing back to 2.4% from 2.7% in February. Meanwhile, a surge in imports saw China report its first monthly trade deficit in six years, with imports exceeding exports by $7.2 billion; the deficit is expected to be temporary, however, and was described by Chinese officials as a ‘blip’.

THE WEEK AHEAD...
Next week’s data may shed some light on how the UK economy is emerging from recession. Following the release of labour market and retail sales figures during the week, the preliminary estimate of first-quarter GDP growth will be released on Friday. A quarterly growth rate of 0.5% would be consistent with recent business surveys, but it should be borne in mind that this preliminary estimate is often subject to hefty revisions: growth in the final quarter of last year, for instance, was initially reported as 0.1%, but is now deemed to be 0.4%. It might therefore be wise to take the figure, whatever it turns out to be, with a large bucketful of salt.

Tue - UK - Consumer prices (Mar)

Wed - UK - Labour market statistics (Feb/Mar); Minutes of April MPC meeting

Thu - UK - Retail sales (Mar); Public finances (Mar); CBI Industrial Trends (Apr)
Thu - USA - Existing home sales (Mar)

Fri - UK - GDP (Q1, 1st estimate)
Fri - Germany - Ifo business climate index (Apr)
Fri - USA - Durable goods orders (Mar); New home sales (Mar)