Tuesday, March 2, 2010

United Kingdom

United Kingdom
• Better news on consumers, but bad news on businesses
• Forecasts for GDP growth in 1Q10 nudged down despite
   upward revision to 4Q09 growth
• MPC holds the door to more QE open

The messages in the data flow this week were mixed, but on balance the negative news was more weighty than the
positive. Paramount among the bad news was the report of an almost 6% q/q decline in real business investment
spending for 4Q, a decline which raises questions about whether business behavior is stabilizing after the collapse
into early 2009. The news relating to the consumer, however, was on balance mildly positive: the ONS confirmed
modest growth in consumption in 4Q after a tiny gain in 3Q, while confidence continues to recover and fears of unemployment have receded to pre-crisis levels. The CBI’s February retail reading also suggests that much of
January’s decline was weather related and does not point to a big impact from the increase in VAT. Taken as whole, the
data continue to point to a fragile recovery, and with weather disruption also playing a role, we have trimmed
our forecast for growth in 1Q09 to 0.3%q/q from 0.5%. We continue to anticipate a firmer pick up beyond then,
which will keep the MPC from extending QE and turn their mind toward tightening. In the meantime, commentary
from the MPC is keeping the possibility of an extension in QE firmly on the table. While we doubt the data have done
enough to generate votes for an extension in QE as early as next week’s meeting, we would expect an ongoing mixed
to weak data flow to prompt David Miles (at least) to vote for further QE in April.

Slump in business capex continues
While the 3Q data had suggested the collapse in business investment spending was abating, this week’s report of a
5.8%q/q decline for 4Q alongside downward revisions to prior data paints a bleak picture. The sharp decline sits
oddly with a number of other data points. Business survey readings on investment have suggested a degree of stabilization through late 2009, while employment appears to have been stabilizing. Imports of capital goods rose 8% in
volume terms in the quarter. One plausible explanation for the weakness of capex while employment holds up is that
credit constraints mean firms are seeking to protect cash flow and doing so by deferring investment plans. However,

as we have pointed out previously, there is little evidence of marked underpeformance by small and medium-size en-

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