Pound Depressed by British GDP Contraction

January 25, 2011

Sterling fell 1.2% overnight against the dollar, which otherwise shows gains of 0.3% against the Canadian and Australian dollars, no change versus the euro, and drops of 0.3% relative to the Chinese yuan and Swiss franc and 0.2% against the yen and kiwi.

Stock prices were mixed in the Pacific Rim, with rises of 1.2% in Japan, 2.6% in Indonesia and 0.5% in Australia and Taiwan but losses of 1.0% in India, 1.1% in Malaysia, and 0.5% in China and Thailand.  In Europe, the British Ftse is down 0.5%, while the German Dax is up 0.4%.

Significant declines of 1.5% and 1.3% were posted by oil and gold prices to $86.55 per barrel and $1326.50 per troy ounce.

Ten-year British gilt yields fell nine basis points to 3.58%.  The yields on 10-year JGBs and German bunds are each two basis points lower.

There was a big surprise in the first estimate of U.K. fourth-quarter GDP growth.  Analysts had anticipated a non-annualized increase of 0.5% from 3Q but instead learned such had dropped by 0.5%.  On-year growth slowed to 1.7% from 2.7%.  This was the first GDP contraction in five quarters and occurred in spite of a 1.4% jump in factory output.  Construction fell by 3.3%, slammed by bad weather, while service-sector activity dropped 0.5% on quarter and to an on-year increase of 0.9% from 2.2% in the year to 3Q10.

Britain’s monthly services index was unchanged in November, 0.5 percentage points weaker than forecast, and up just 1.5% on year.

The U.K. net public sector borrowing in December of GBP 16.8 billion was smaller than analyst forecast of GBP 20 billion.  The nine-month tally since April of GBP 118.4 billion was down from GBP 126.8 billion a year earlier.  Britain’s debt grew to 59.3% of GDP in December from 52.2% at the end of 2009.

The IMF revised GDP forecasts that were made three months ago.  The revisions were small except for a revision from 2.3% to 3.0% in the case of 2011 U.S. growth.  Other 2011 GDP projections are now 4.4% for the world, 2.5% for advanced economies including the euro area (1.5%), Japan (1.6%) and Britain (2.0%), and 6.5% for emerging and developing economies including China (9.6%), India (8.4%) and Brazil (4.5%).  In 2012, the IMF expects world growth of 4.5%, with advanced economies expanding 2.5% again and other economies collectively growing 6.5%.

The Bank of Japan’s Policy Board as expected retained a target overnight interest rate range of zero to 0.1% and released new forecasts that see GDP growth slowing to 1.6% in fiscal 2011 from 3.3% in fiscal 2010 and positive CPI inflation of 0.3% next fiscal year followed by 0.6% in the year to March 2013.

The Reserve Bank of India has lifted its key repo and reverse repo rates by 25 basis points each to 6.5% and 5.5%.  The move was predicted and needed to counteract intensifying inflationary pressures.

Australian consumer prices increased only 0.4% last quarter, half as much as predicted.  Consumer prices went up 2.7% between 4Q09 and 4Q10, up from 2.1% in the prior statement year but down from 3.7% in the four quarters to 4Q08.  One measure of core inflation, the trimmed mean CPI, rose just 0.3% on quarter and 2.2% on year, down from 0.6% on quarter and 2.5% on year in the third quarter of 2010.  These data reduce any urgency attached to further rate tightening.

Australia’s index of leading economic indicators went up 0.3% in November, half as much as October’s increase.  South Africa’s index of leading economic indicators slid to 129.7 in November from 129.8 the month before.  Hong Kong’s trade deficit widened 85% to HKD 43.5 billion in December from HKD 23.5 billion in November.  Exports were 12.5% higher than in December 2009.

French consumer spending on manufactured goods proved resilient with a 0.6% monthly advance in December on top of November’s outsized 2.7% leap.

The UBS gauge of Swiss consumption failed to improve as much as forecast, rising to 1.84 last month from 1.62 in November.

German consumer confidence unexpectedly improved to 5.7 in February from 5.5 in January.  Spanish producer prices jumped 0.9% last month and accelerated to a 5.3% 12-month rate of increase from 4.4% in the year to November.  Ireland’s PPI was unchanged on month and up 1.0% on year in December.  Finland’s jobless rate was 7.9% last month, up from 7.0% in November.  Greece recorded a EUR 1.47 billion trade deficit in November. Czech business and consumer confidence each slid slightly in January, while Hungarian retail sales were down on year by 0.3% in November and 2.5% in January-November.

Canadian seasonally adjusted consumer prices rose 0.3% on month overall and 0.2% for the core index.  In the year to December, consumer price inflation accelerated to 2.4% from 2.0% in November.  Core inflation of 1.5% was a tenth greater than November’s 1.4% pace.

Scheduled U.S. data today include the Case-Shiller and FHFA house price indices, the Conference Board consumer confidence index, the Richmond Fed manufacturing index, weekly chain store sales and weekly consumer confidence.  President Obama delivers the State of the Union address this evening.  The World Economic Forum in Davos Switzerland officially opens tomorrow.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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