Economic Outlook: Will Consumer Spending Weather the Storm?

This week's highlights

Retail sales from the US are one of the most important economic indicators this week. Retail sales account for an important part of consumer spending, and since it is feared that consumer spending will take the economy to recession, the financial markets will keep a close eye on retail sales. The fact that consumers have obviously become more pessimistic increases the interest in the US retail sales figures.

Generally, consumers are facing several challenges in the short term. Basically, consumer income increases solidly, but price increases of petrol and food undermine the increase in consumer income quite significantly. The banks have become more reluctant to grant loans to the consumers - mainly in connection with home purchases though. The home owners are also burdened by falling house prices, but traditionally, this effect will spill over with some delay.

Consumer spending is, however, supported by some factors. As mentioned, consumer income rises solidly. Refinancing of mortgage loans has increased in the wake of the interest-rate cuts, and traditionally this has caused a subsequent rise in retail sales. Furthermore, most American tax payers will receive a cheque from the tax authorities in the spring. Home owners with floating-rate mortgage loans who are facing interest adjustment will benefit from the Fed's interest-rate cuts.

Therefore, we expect a moderate increase in retail sales in February

This week's other highlights

- The US: balance on goods and services, consumer prices
- The euro zone: consumer prices and ZEW from Germany
- China: consumer prices

Monday

China: consumer prices - February

Inflation rose to 7.1% y/y in January, up from 6.5% in December. This was the largest rate in 12 years. The high inflation rate is mainly driven by food prices (86%) - consumer prices exclusive of food rose by 1.5% y/y. Food prices rose by 18.2% y/y in January, up from 16.7% in December.

Rising meat prices are still adding to inflation (the ”old” story about swine disease) - pork prices rose by 60% y/y in January. Furthermore, cooking oil increased by 35% y/y in January driven by global factors such as demand for ethanol. Furthermore, there are also temporary price increases caused by the Chinese New Year and in part by the heavy snowstorm that struck the country in January and February (the worst in 50 years). The snow damaged about 12m hectares of crops!

Since the full effect of the snowstorm and the New Year is not reflected in the inflation rate for January, inflation for February is very likely to increase further. However, in the slightly longer term, we expect inflation to decline again (towards 3-4% y/y) - not least as meat prices start to normalise when the swine production increases and the effects of the New Year and the snowstorm will no longer be reflected.

The UK: industrial production - January

The industrial production was weak in the last six months of 2007 and declined in the last two months of 2007. The annual rate of increase came to 0.7% in December. A large part of the weak development can be ascribed to the manufacturing industry, which closed the year with a growth rate of zero (0% y/y). We do not expect a turn in the manufacturing industry in coming months, one of the reasons being slower growth in the UK, the US and the euro zone in H1.

The UK: RICS - February

The RICS survey is the real-estate agents' assessment of the housing market, i.e. house prices, housing sales, etc. For instance the ratio of housing sales to the stock of unsold houses is a good indicator of the future development in house prices. This ratio has fallen significantly since early 2007 - in recent months especially due to an increase in the stock of unsold houses. Thus for a long period of time, the index has indicated falling growth in house prices which we have seen from the second half of 2007. In January the house price index was at -54.7, the lowest level since 1992. We expect that RICS will still point to a weak housing market in coming months.

Tuesday

The US: balance on goods and services - January

The rank of the balance on goods and services among the most important economic indicators has fallen a bit since focus is on the risk of recession and thus on the growth indicators in the US.

However, there are some interesting angles with respect to foreign trade; one of them is the allegation of the rest of world's decoupling from slower growth in the US. This de-coupling depends on a possible fall in American imports, which in fact correspond to the rest of the world's exports to the US. Thus imports will be an indication as to how severely the rest of the world will be hit by a slowdown in growth in the US.

Growth in US imports has been considerably weaker this time round. Since the middle of 2006, import growth has been less than 5% and is currently about 0%. The US has thus contributed considerably less to growth in the rest of the world through exports than up to the last recession, and therefore the effect of economic slowdown in the US will be less severe than during the last recession.

The deficit on the balance of goods and services crept below USD 60bn in December again after being pushed up in November by sharply rising oil prices. The rising oil prices were tough on the deficit as illustrated by the fact that the deficit exclusive of oil actually fell by considerably more than the aggregate surplus. Oil imports account for about one third of the aggregate trade deficit. Oil prices are not expected to weigh heavily in January, since they were largely unchanged in comparison with December.

Exports are expected to rise at a sensible pace, as indicated by the ISM Exports index, which is at 56. The ISM Import index, on the other hand, has fallen, which indicates a minor fall in imports.

The financial markets will be looking to see whether the import of investment goods continues to increase, since this will give an indication of the corporate sector's propensity to invest. This is of importance, since investment will support growth together with consumer spending and exports. Imports of investment goods have been largely unchanged for the past few months.

Germany: ZEW - February

The movements over the past month and the high uncertainty in the financial markets will undoubtedly be reflected in ZEW which is based on a survey of up to 350 financial analysts. The expectation index (= the ZEW announced) rose marginally in February to its next-lowest level since 1993. The all-time low was in January 2007. In our view, ZEW will rise again in March, somewhat more sharply than in February - we find that the index underestimates the current economic picture. We base this, inter alia, on the latest Ifo and PMI numbers, which were somewhat better than expected in February. The index is currently high - too high we find in consideration of the current state of the German economy. We expect March to show a fall.

Friday

The US: consumer prices - February

The inflation indicators are attracting attention because of the risk of stagflation (a combination of rising inflation and economic slowdown). So far, the Fed has indicated that economic growth is the most important factor in the monetary policy. But the Fed governors have also signalled that they are concerned about inflation, particularly about the risk of expectations of rising inflation.

Overall consumer prices have risen relatively sharply over the past five months, part of which is due to rising prices of energy, food and medicine. The prices of energy have risen somewhat in February over January, while the prices of natural gas have risen sharply. This indicates that the overall consumer prices will have risen fairly sharply in February.

Core consumer prices also showed stronger rises in three out of the four past months. In January, the prices of clothes rose sharply, and in that sector we do not expect the rise to be repeated. There are thus prospects of a slightly weaker rise in core consumer prices - presumably close to the trend growth rate of 0.2%.

The US: speech by Mr Bernanke of the Fed

Mr Bernanke will make a speech a few days before the Fed meeting on 18 March. Since Fed officials traditionally do not make any statements during the week up to the meetings, we doubt that there will be any new signals about the economy or the Fed's intentions.

The euro zone: final and core consumer prices - February

When the final consumer prices are announced, also core consumer prices will be revealed. The rate of increase of core consumer prices exclusive of energy and food slowed from 1.9% in December to 1.7% in January. Headline inflation, for which preliminary data have been announced, remained at 3.2% in February - pushed up by rising prices of energy and food. If core inflation remains moderate, this will give the ECB time to breathe, and this may pave the way for interest-rate cuts later.

Jyske Markets - FX Research

Posted in: Economy,Finance and Investment,Forex