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Thursday, June 30, 2005 11:08 AM


UK Headed for Recession


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UK Q1 GDP revised down sharply for the first quarter of the year further strengthening the case for an interest rate reduction in the coming months, official figures confirmed today.

"In its quarterly national accounts, the Office of National Statistics revealed that UK GDP during the period grew by 0.4 pct from the previous quarter and 2.1 pct on a year-on-year basis. Both were downward revisions from rises of 0.5 pct and 2.7 pct respectively.

The latest adjustment shows that economic growth was below its long-run average in the first quarter -- the so-called quarterly trend rate of 0.6 pct.

On the expenditure side of the national accounts, the statistics office said household expenditure growth was revised down sharply to show the smallest growth since the last quarter of 2000.

It revealed that household expenditure rose by just 0.1 pct in the first quarter, down from the 0.3 pct provisional estimate.

Meanwhile, government expenditure continued to rise at a steady rate of 0.7 pct in the first quarter from the previous quarter --- unchanged from the previous estimate."


UK interest rate futures soared on this news, with front month contracts rallying far more than the back month contracts that already had started to price in multiple rate cuts. The Sept 05 Short Sterling contract rose 10 bps, Dec 05 rose 8 bps, March 05 rose 7 bps, June 05 rose 6 bps, and Sep 06 rose only 4 bps. Traders are increasing willing to bet that the next move in the UK is a cut, and that cut is coming sooner rather than later. A full quarter point cut for September 2005 is now priced in.

Pay particular attention to the fact that UK consumer spending has weakened and that Retailers are pleading for a rate cut.

"Hard-pressed retailers were last night demanding an immediate cut in interest rates from the Bank of England after the CBI reported that conditions on the high street were at their bleakest for more than two decades.

Amid reports of weak consumer demand, weak profits and early summer sales, the employers' organisation said that it could not find a worse month for retailers in the 22-year history of its distributive trades survey

The CBI called an unscheduled press conference to report that consumer belt-tightening meant 42% of retailers saw business in June down on a year earlier, while only 23% said it was up."


Indeed there is a far bigger correlation between consumer spending and home prices than consumer spending and stock market gains.

The British Pound was hammered on this news, falling to 1.782 at the time of this post. Following is a daily chart of the British pound.



Also note that the UK Q1 current account deficit worsened to 5.8 bln stg vs 4.1 bln in Q4. US dollar bears need ponder this: The UK has now recorded a current account deficit for every quarter since the third quarter of 1998. The EU is in shambles, Chinese banks are deep in trouble, and the UK does not exactly seem to be such a pillar of strength either. Everyone wants (or do I mean expects) the US dollar to fall, but there is not another currency worth buying. Of course this bodes well for gold over the long haul. One of the reasons gold has begun to rally in other currencies is simply because there are few other places to hide.

Finally, Forbes is reporting that UK June consumer confidence index fell to -3.

"Consumer confidence in June fell for the third month in a row as Britons became more nervous about the prospects for the general economy, according to a monthly survey from GfK Martin Hamblin.

GfK's headline index fell to -3 in June from -1 in May, well below expectations for the index to remain unchanged.

Meanwhile, the sub-index measuring perceptions of the general economic situation in the country over the last 12 months slumped by five points to -18 in June from -13 in May, GfK said."


Bear in mind, all of this should have been completely expected. More to the point it is exactly what people should be expecting to happen in the US as well. No one seems to think a recession is around the corner in the US, the masses do not see the hammer that is going to hit them over the head in housing, and US stocks certainly are not priced for either pullbacks in consumer spending or a US housing bust.

Everyone seems to think that Greenspan can pull another rabbit out of his hat. I have news for everyone: there are no more rabbits left in Greenspan's hat, and when rate CUTS start happening in the US, they will not have any affect.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

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