UK Gross Domestic Product (QoQ) (4Q 2) (09:30 GMT; 04:30 EST)
Consensus: 0.6%
Previous: 0.4%
Outlook: Europe’s second largest economy is expected to have expanded at its fastest pace in a year in the fourth quarter as a strong services sector and a rebound in consumer spending picks up some of the slack from the slump in the industrial group. Industrial production in the fourth quarter fell into its second recession in three years with the final month reporting a 2.7 percent, annually-based contraction. Producers have been hit particularly hard by soaring input costs and softening demand from consumers as confidence cools with the economy. However, there were means for growth in the period. Services, which account for nearly three quarters of the economy, were running at a strong clip in the final three months of the year. A 0.9 percent growth in the sector helped continue its support of the 54 consecutive quarters of growth the UK economy can claim fame to. Spending by consumers also picked up for the period according to preliminary figures. Retail sales, comprising nearly 40 percent of consumption, expanded for the five consecutive months in December despite a precipitous drop in consumer’s optimism. With the economy quickening its pace of growth, speculation of a second rate cut to follow the one made on August has declined significantly. With growth picking back up and spare capacity becoming visible in the economy, there is little demand from the MPC to entertain another rate cut to spur growth.
Previous: UK growth in the three months ending September slowed slight to 0.4 percent, following the third quarters 0.5 percent pace, as business spending detracts from strong figures in consumer spending and the housing market. Businesses, feeling the pressure of a stingier consumer and steadily increasing energy prices, reported weaker numbers for the quarter. Corporate investment edged only 0.3 percent higher in the three months compared to a 1.3 percent rate in the second quarter on the outlook of shaky profit margins. Industrial production was hit especially hard with an average 1.4 percent decline for the same period. Offsetting this components weakness somewhat however were the first inklings of the reemergence of consumer confidence, and with it spending. Sentiment was massaged by a jobless rate at an over 10 year low housing prices picking back up from what was initially thought the deflation of the bubble formed over the previous years. Consumers increased their purchasing habits by 0.5 percent in the third quarter on the back of 0.2 percent and 0.1 percent in the second and first respectively.
KOF Swiss Leading Indicator (FEB) (10:30 GMT; 05:30 EST)
Consensus: 1.25
Previous: 1.22
Outlook: Switzerland’s leading economic indicator is set to improve for the tenth consecutive month in February according to economists’ consensus of a 1.25 read. Expectations derived from the six elements comprising the indicator continue to benefit from strong data coming at the end of 2005 that drove the Swiss economy to expand 1.3 percent for the year. With business leaders and consumers expecting their spending habits to expand into 2006, they are already setting the foundation for the government’s expectation of 1.8 percent expansion this year and even SNB President Roth’s forecasted 2.0 percent. And expectations are already being met. The pull back in energy prices recently has facilitated stronger demand both domestically and abroad which in turn has provided Swiss businesses with new orders and consumers with more jobs and bigger bank accounts to keep the economy chugging along. As Switzerland’s forecasts for the future continue to improve along with the economy, SNB monetary policy markers will better be able to narrow its focus on taming inflation at coming meetings.
Previous: The KOF economic research institute’s compilation of indicators that attempts to predict the economy’s direction in the coming six months marked the 28th month of expected growth in January. The figure originally posted below expectations of a drastically higher 1.42, but this was taken in stride with the revision of December’s 1.36 to 1.17. What some deemed a bad sign, others hold steadfast in the indicator’s strong support of the economy. Switzerland’s economy has posted promising levels of growth through the end of 2005 as strong demand for Swiss goods abroad have stimulated the overall economy. The trade balance hit a 6 month high 1.214 billion Francs in January owing to reemerging confidence in Europe’s largest economies. Businesses turned the profits back into the economy to increase their operations and labor resources. Completing the cycle, consumers subsequently benefit with a drop in the unemployment rate and higher wages that sparked a seventh month of strong sales at retailers.
Durable Goods Orders (JAN) (13:30 GMT; 08:30 EST)
Consensus: -1.2%
Previous: 1.8%
Outlook: Durable goods orders are expected to start the year on the wrong foot with a 1.2 percent decline in bookings for non-perishable goods. The robust pace of orders has slowly weaned economic growth off of its consumer spending dependency. Manufacturing figures for the same month are supporting the consensus of a decline. The Institute of Supply Manager’s measure of business activity slowed to a five month low 54.8 while the largest manufacturing regions have individually reported slowdowns. New York region’s measure dropped significantly from 26.28 in December to slower 20.12, while both Philadelphia and Chicago area factories reported activity at their lowest levels in June. This drop in business activity and incoming orders is being attributed to pricier raw materials and growing backlogs and delivery times - products of capacity constraints. To correct these issues, and in turn increase output, durable goods producers will need to continue their strong rate of spending and hiring to meet demand. This will help economic growth rebound to the strong pace held until the final quarter of last year. Another byproduct of a faster pace of business investment will be higher levels of inflation which could potentially leave rate hikes beyond the march meeting more likely.
Previous: Orders for goods that will last for at least several years rose 1.8 percent in December following the previous month’s 5.3 percent increase. Widening profit margins and a more liberal pace of business spending were responsible for the rise in the goods’ number, the third consecutive increase. Businesses were flush with cash in the last half of 2005 on the back of several years of strong economic expansion. This combined with the fact that the amount of capacity in use grew to its highest level in over five years, left businesses seeking to expand their machinery and facilities to match growth in the both labor and resources. Orders for machinery accelerated 6.5 percent for the month. Moreover, this advance in orders is giving weight to St. Louis Fed President William Poole’s claim that the US economy will retain its strength as business investment replaces slowing consumer spending. Other areas were reporting higher orders for the final month of year as well. Bookings for motor vehicles jumped 6.6 percent while those for transportation grew 1.9 percent. Making a drastic shift for the month were aircraft orders which declined 8.1 percent following a 139 percent surge in orders the month before.
Richard Lee is a Currency Strategist at FXCM.