UK ECONOMIC OVERVIEW

Well the MPC came back with a 3 way split yesterday with a 7-1-1 vote. The surprise being Tim Beasley’s vote for a hike. Due to this hawkish shift the markets gave strength to GBP. The committee looked to send a signal that their focus was to reducing inflation, therefore would be standing its ground to achieve this. As such this leaves little room for a rate cut.

As the Feds Paulson indicated, the US house of representatives yesterday passed a bill to support Fannie Mae & Freddie Mac, helping to alleviate some of the concerns hanging over the situation & thus the US economy. However with the Beige Book highlighting the slow down of the US economy over the past couple of months, anyone looking for a rate increase in the US in 2008 will have their hopes dashed.

In the Eurozone today the PMI data is released which is expected to show falls, as the credit crunch takes its toll & any positive news in regards to the German Business Climate release, could be offset by the PMI data.

The UK retail sales figures for June are released this morning, May’s figures showed a 3.5% rise, which was attributed to a warm May, however todays figures are not expected to follow suite, the consensus being for a 2.6% fall (our economists forecast 3%), which could have tongues wagging again with fears for a UK recession & a knock on effect for the GBP.

With all the coverage in the media at the moment about a UK recession, our Economists have produced a document in regards to these fears which is most defiantly a worthwhile read. As such I have attached this & would highly recommend a read.

UK ECONOMIC OVERVIEW
Recessions are rare – there have only been three in the last forty years. But when they occur they involve sharp contractions in production and it can take years to make good the lost output.

An important driver of previous recessions has been significant destocking by firms, which amplifies the initial fall in production as demand cools. A build-up in stocks in the second half of 2007 raises concerns over the current outlook in this regard. But the state of corporate balance sheets looks in reasonable shape, which may limit the downside.

Our central case is that the UK will narrowly avoid recession this year. But the risks are rising sharply. Should a recession occur a step-change deterioration in output, unemployment and house prices is likely.

Hazel Wilkinson | Treasury Solutions | nabCapital™  

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