Potential contraction in Eurozone
Overnight markets performance have remained positive while the USD lost its way somewhat against GBP, EUR and commodity currencies as risk appetite picked up following positive statements from China reaffirming their support of Europe.
Coming up, the UK MPC’s decision to increase asset purchases by £50 billion to £325 billion this month will be explained in the February Inflation Report. The accompanying statement to that decision alluded to a deterioration in the international economy, particularly the eurozone. We would expect those messages to be continued, if only because the MPC would otherwise have to admit to underestimating the speed of recovery in the UK.
We doubt that there will be significant changes to forecasts for both growth and inflation. GDP growth this year should be a little lower, but with an offset from higher GDP growth in 2013. The inflation projection should remain largely unchanged, which leaves the outlook for monetary policy data dependent. While the February projection will undoubtedly imply the need for further QE from May, should the current run of stronger data continue then we MPC can afford to delay further purchases.
We have UK unemployment data out this morning – we look for a small fall in the claimant count measure of unemployment reflecting slightly stronger hiring data and also the continuing crack-down on benefit claimants. That will leave the ILO measure (number of unemployed workers divided by the total civilian labor force) unchanged at 8.4%, while headline weekly earnings growth is likely to slip to 1.8%. Most concentration will be on the ILO measure which is likely to show over 3 million out of work. The unemployment rate for 16-24 year olds remains over 38%, with over 1 million looking for work. Around one third of those as full0-time students looking for temporary work so the underlying position is still not as stressed as in the 1980s.
With French and German Q4 GDP released, eurozone average is likely to show a contraction in output. The flash estimate suggested that German output contracted by 0.3% which is why the market is looking for a 0.4% fall in eurozone output which would reflect the weaker prospects in the periphery. That would see the eurozone contracting at twice the pace seen in the UK and leave it on the verge of a technical recession as we suspect that even if Germany manages a bounce in Q1, the rest of the eurozone will fail to grow.
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