UK: falling GDP in Q4 but escaping recession

Incoming data, such as the production and construction data published last week, suggests that the UK economy contracted in Q4 2011. Fourth quarter GDP is due on January 25th and our forecast is for a -0.2 per cent quarterly drop. Meanwhile the latest Bank of England forecast is for zero GDP growth both in Q4 2011 and Q1 2012. For 2011 as a whole we estimate that GDP expanded only 0.9 per cent which can be compared to 3 per cent in Germany, 1.5 per cent in the euro zone and 1.8 per cent in the U.S., respectively. While the ongoing crisis in the euro zone and worsening economic outlook for many important trading partners are downside risks, leading indicators such as the PMIs have been encouraging, suggesting that GDP growth will turn positive again in the current quarter. The UK may thus escape a technical recession. All in all, our GDP forecast has been lowered to 0.4 per cent for 2012 and 1.7 per cent in 2013 respectively from 0.8 and 1.8 per respectively in Nordic Outlook, November 2011. The consensus is on a slippery slope too, and is currently only a whisker away from our forecast at 0.5 per cent (2012) and 1.8 per cent (2013). Inflation is still running well above target, but will continue its decline from the highwater mark in September 2011. Meanwhile the labor market clearly has a soft underbelly and the unemployment rate (ILO measure) recently reached its highest level in 16 years. The claimant count rate has turned higher too. In line with the development in the broader economy, the unemployment rate is expected to rise gradually in 2012-13. While underlying wage growth may hold steady at its current level at around 2 per cent, the profound downward pressure on real wages from CPI inflation is diminishing. Regarding to monetary policy, we think the BOE is likely to adopt another expansion of the Asset Purchase Facility (GBP 50bn) when the current program expires in Feb.

TUESDAY 17 JANUARY 2012

Mattias Brur, SEB Economic Research, +46 8 763 85 06

Key data Percentage change

2010 2011 2012 2013 GDP* Unemployment** Inflation* Government deficit***

Source: SEB

2.1 7.9 3.3 -10.2

0.9 8.0 4.4 -8.5

0.4 8.5 2.7 -7.0

1.7 9.0 1.4 -6.0

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

Economic Insight

ACTIVITY INDICATORS
GDP is slowing down, but hopefully not as much as this model suggests
percentage change, year ago
5 3 1 -1 -3 -5 -7 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 5 3 1 -1 -3 -5 -7 5 3 1 -1 -3 -5 -7 00 01 02 03 04 05 06 07 08 09 10 11 12

Alternative model is suggesting GDP growth around zero

Year-on-year percentage change
5 3 1 -1 -3 -5 -7

GDP

SEB GDP indicator

Source: Reuters EcoWin, SEB

GDP

SEB alternative GDP indicator

Source: Reuters EcoWin, SEB

A modern day depression?

Cumulative changes since January 2008
0 -1 -2 -3 -4 -5 -6 -7 -8 Q1 Q3 08 Q1 Q3 09 Q1 Q3 10 Q1 11 0 -1 -2 -3 -4 -5 -6 -7 -8

GDP

Employment

Hours
Source: Reuters EcoWin, SEB

The industrial sector is sagging

Net balances
20 10 0 -10 -20 -30 -40 -50 -60 -70 00 01 02 03 04 05 06 07 08 09 10 11 20 10 0 -10 -20 -30 -40 -50 -60 -70

Industrial Confidence Indicator Order books

Source: Reuters EcoWin, SEB

Low confidence suggesting negative PCE growth

Index, %change QoQ
20 10 0 -10 -20 -30 -40 -50 88 90 92 94 96 98 00 02 04 06 08 10 12 -2 -3 2 1 -1
Percent

Gfk consumer confidence (LHS) Real consumer spending (RHS)

Source: Reuters EcoWin, SEB

Economic Insight

After the crash, UK house prices are going sideways now

Rebase to 100 at the peak
100 90 80 70 60 50 40 00 01 02 03 04 05 06 07 08 09 10 11 100 90 80 70 60 50 40

Halifax

Nationwide
Source: Reuters EcoWin, SEB

Real exchange rate

Index, 2000 = 100
125 120 115 110 105 100 95 90 85 80 75 70 74 77 80 83 86 89 92 95 98 01 04 07 10
Source: Reuters EcoWin, SEB

125 120 115

Stronger

110 105 100 95 90 85

Weaker

80 75 70

M4 growth still negative

Year-on-year percentage change
20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: Reuters EcoWin, SEB

20.0 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0