An excerpt from the lastest Top Down Outlook
As widely expected, the ECB decided to leave rates unchanged at 1% during the monetary policy meeting last week. At the press conference the ECB president Trichet did not contradict the possibility that rates are likely to remain unchanged at least until the end of H1 ’10 and then gradually increase to 1.5% by the end of 2010. Trichet pointed out that economic activity in the Eurozone continued to expand towards the end of 2009, although a number of supporting factors are only of a temporary nature. The level of uncertainty is very high. Inflation is expected to remain at about 1% in the short term and expectations concerning inflation over the medium to long term are firmly held. Far-reaching risks associated with the economic outlook and inflation are on the whole balanced. Trichet also emphasized that the ECB will continue to support the credit market, but will gradually phase out the extraordinary liquidity measures. As for Greece, Trichet shunned the hypothesis that the country will leave the Eurozone and that much work remains to be done.
A mixed batch of data came out over the course of last week. On the negative side, the worst indications came from actual GDP growth in Germany during 2009: GDP contracted by 5% in 2009 as against market expectations of -4.8%. This means that Q4 GDP may have been much weaker than previously expected and a flat GDP seems the most likely outcome in Q4. The public sector deficit was at 3.2% in 2009, slightly below market expectations of 3.5%. Italian industrial production was also lower than market expectations in November, rising by 0.2% m/m as against market expectations of 1% m/m. Compared to November ’08, industrial production contracted by 5.2%. On the positive side, both French industrial production and the business confidence index came in better than expected. However, this may be the result of the French recovery being slower than that of the other major European economies.
Data published during the last week were in line with expectations of the European economy coming out of recession very gradually.
Macroeconomic data published during the last week came as a reminder that economic recovery in the UK is likely to be subdued in the short term. Even if industrial production rose more than expected in November (+0.4% m/m as against market expectations of +0.3% m/m), this was the result of the increase in the mining and utilities sectors, while manufacturing production unexpectedly stalled for the second consecutive month. The lower than expected figures in the manufacturing sector indicated that in Q4 the UK economy should come out of recession, but that the growth rate may remain very low. As regards the real estate sector, a sign of caution came from the RICS house price balance: in December the number of estate agencies reporting that prices rose exceeded those reporting declines by just 30%, down from 35% in November. The data shows that the property market lost momentum in December.
Inflation rose higher than expected in December: +0.2% m/m as against market expectations of 0.0%. Prices increased by 0.9% compared to December ’08, the first positive year-on-year change since March ’09. After adjustment for the direct effect of the decrease in interest rates, the December rate of inflation was 2.7 per cent. Even if they were higher than expected, the December figures on CPI do not alter our view that the Riksbank will mantain rates unchanged until at least H2 2010.
In December, inflation was substantially in line with market expectations, rising by 0.2% m/m and 2% y/y. Price rises in electricity and airline fares contributed most to the monthly growth, while the year on year change was mainly due to price increases in fuel and lubricants. CPI-ATE remained unchanged at 2.4% y/y. The December figures did not help determine whether the Norges Bank will increase the rate again in February or March (our base scenario).