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RussianUK Economy Contracts in 4Q
The UK economy met expectations and contracted in the fourth quarter. The drop in quarterly terms of 0.2% was a bit more than expected by economists (-0.1%) and did cause the pound to weaken against the US dollar and euro subsequently thereafter.
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However, the pound managed to reclaim most of its lost ground against the dollar and managed to gain on the day versus the euro as we worked our way through the New York morning.
Therefore this announcement while having some headline reaction seems to have been mainly priced into the market and the next key question is what will be next for the Bank of England - whether we should expect another round of quantitative easing or not.
If There's a Technical Recession, Will Likely Be a Shallow One
First however breaking down the details of the fourth quarter report we see that much of the softness came from a decline in factory orders as exports falter. That points to weakness from the UK's key trading partner - the euro zone.
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From Financial Times: "The primary source of negative news in the fourth quarter was the industrial sector, where weakness in the UK's key export markets is certain to have been a key factor, along with the unseasonably mild weather which depressed energy output...
The output of the nation's productive industries fell by 1.2 per cent. Manufacturing, which accounts for about 80 per cent of that, fell by 0.9 per cent, while utilities output contracted by 4.1 per cent, reflecting an unseasonably warm winter.
Separately, new data from the banking industry showed that lending to private, non-financial companies (PNFCs), after a slight pick-up in November, fell sharply in December."
On top of impacting exports and therefore causing a soft quarter for manufacturing, the euro zone crisis is also the main reason that's banks have been reluctant to lend and a main factor for business having poor confidence.
However with the European situation showing some sense of the normalcy - even though underneath it all crisis conditions remain - the first quarter of 2012 may have some hope of showing a rebound compared to the conditions we saw in the fourth quarter of 2011.
If the economy shows another month of contraction then UK would be in a technical recession, but if growth shows improvement then it may skirt a technical recession. But, even if growth is negative for another quarter the overall recession should be a shallow and short-lived one.
If we look at the forecast for the full year however the expectation is for tepid growth of about 0.7% which would follow a 0.9% growth rate in 2011 meaning that the year ahead will be a tough one.
A lot continues to ride on what happens in Europe and one sense of comfort was the recent PMI indicators from Europe which showed stabilization which is a positive backdrop for the UK.
However with rising unemployment, continued weakness in domestic demand, as well as softer exports to Europe, the prospect for a firm recovery in the first half of the isn't in the cards.
