Recession-Hit UK Finally Confronts Its Fiscal Abyss: Eco Week

(Bloomberg) — Britain’s plan to repair its damaged public finances and market credibility will finally emerge this week in the wake of data showing an intensifying cost-of-living shock in a recession-stricken economy.

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Spending cuts and tax increases may feature heavily in the program that Chancellor of the Exchequer Jeremy Hunt will unveil on Thursday. He is expected to announce measures totalling at least £50 billion ($59 billion) to bridge a budget chasm.

Compounding the challenge is an ever-worsening economic squeeze. A lengthy recession is now likely under way, as signaled by gross domestic product data released last Friday, and inflation numbers for October due on Wednesday will probably show the highest outcome yet seen in the current energy crisis. The median forecast is for a jump in consumer-price growth to 10.7%.

The choices taken by Hunt and Prime Minister Rishi Sunak will determine how far Britain can weather that storm, and also move on from its remarkable financial-market debacle of recent weeks.

A package of unfunded tax cuts unveiled by former Chancellor Kwasi Kwarteng and then-premier Liz Truss in September prompted a loss of confidence in the UK economic framework that has become a parable for other countries to avoid.

The new government that took office after them has two years left to restore perceptions of the ruling Conservative Party’s economic competence at a time when some voters are increasingly questioning the wisdom of its signature policy, exiting the European Union. The next general election is due by January 2025.

In the meantime, the Bank of England is likely to keep raising interest rates to bring inflation under control. Clues on its intentions may emerge on Wednesday as Governor Andrew Bailey testifies in Parliament alongside three of his colleagues.

What Bloomberg Economics Says:

“The BOE probably won’t be comfortable taking its foot off the brake until services inflation shows signs of dropping back toward its long-run average.”

–For full analysis, click here

Elsewhere, reports that may show continuing US retail-sales growth, accelerating Japanese inflation, and the European Central Bank’s latest financial-stability assessment will also focus investors in the coming days.

Bloomberg’s New Economy Forum runs Tuesday to Thursday, counting Singapore’s Deputy Prime Minister Lawrence Wong, Singapore Senior Minister Tharman Shanmugaratnam, US Trade Representative Katherine Tai and CEOs including Bill Winters of Standard Chartered, Noel Quinn of HSBC, Shou Chew of TikTok as among the key speakers and panelists.

Click here for what happened last week and below is our wrap of what else is coming up in the global economy.

US Economy

In the US, retail sales figures will offer clues on the health of consumer demand entering the final quarter of the year. Economists project a solid increase in the value of October purchases, powered by motor vehicle sales and indicating sustained spending despite high inflation.

The data will help shape economists’ estimates of fourth-quarter economic growth in the wake of huge rate increases from the Federal Reserve. The Atlanta Fed’s GDPNow estimate has gross domestic product rising an annualized 4% during the period, reflecting 4.2% growth in personal consumption.

Other reports this coming week include the government’s October producer price index, which is forecast to maintain momentum on a monthly basis. The figures follow the release of consumer price data that indicated inflationary pressures are beginning to moderate.

Reports on industrial production, housing starts and existing-home sales are also on tap. The housing data will probably underscore the hit to demand and construction from this year’s rapid rise in borrowing costs.

Asia

China releases its latest retail sales, industrial production, investment and employment data on Tuesday, with economists anticipating another lean month as Covid restrictions cap activity.

Japan’s post-pandemic recovery likely slowed in the third quarter as pent-up demand eased and a weak yen and higher import prices weighed on consumption and trade.

The GDP figures out Tuesday will probably be overshadowed by inflation figures later in the week showing a further acceleration in price growth exacerbated by the slide in the currency.

Bank of Japan Governor Haruhiko Kuroda’s comments during the week will be closely scrutinized for any hint of change in his staunch easing position.

Minutes from the Reserve Bank of Australia’s November meeting will further flesh out the board’s thinking on policy. That stance might need revisiting if wage data on Wednesday surprises or jobs figures on Thursday offer a shock.

On Thursday, the central banks of Indonesia and the Philippines are expected to continue their monetary tightening.

Europe, Middle East, Africa

Several euro-zone policy makers will speak this week at events around the euro region and as far away as Tokyo. Among the highlights will be ECB President Christine Lagarde, who is scheduled to make remarks twice in coming days.

ECB officials’ half-yearly assessment of financial stability, on Wednesday, and an announcement on early repayments of long-term loans, on Friday, will also draw investors’ attention.

The calendar for data is relatively light, with German investor confidence on Tuesday a likely highlight at a time when the country is seen enduring a deeper recession than its neighbors.

Final readings of third-quarter GDP and October inflation for the euro area will be released on Tuesday and Thursday respectively.

In the Nordic region, economists predict that Swedish annual consumer-price growth probably surged further to 11% in October. Those data are due on Tuesday, while Norwegian GDP on Friday is seen likely to show continued growth.

Looking south, Israel’s inflation data on Tuesday will be closely monitored for signs of whether a slowdown in price rises continued in October. The Bank of Israel has front-loaded rate increases this year, and could start slowing the pace of hikes if inflation continues to weaken.

With the pace of consumer-price gains exceeding the National Bank of Rwanda’s forecast, its monetary policy committee may be persuaded to raise rates for a third consecutive meeting on Tuesday.

On the same day, Nigerian inflation is expected to remain at more than double the 9% ceiling of the central bank’s target band for a fifth straight month, as the naira continues to plunge on the widely used black market, and the worst floods in a decade drive up food prices.

Latin America

Brazil’s GDP-proxy figures for September are expected to show further recovery in the country’s services sector even as the month-on-month reading falls for a second month.

Chile’s third-quarter GDP report should point to the dramatic slowing in the economy over the last year as the effect of pension withdrawals subsides. Looking ahead, challenges abound as sticky double-digit inflation gives the central bank little room to ease record high interest rates anytime soon.

Uruguay’s central bank will likely hike its key rate for an 11th straight meeting in a tightening campaign that’s pushed up borrowing costs 625 basis points to 10.75%.

In Colombia, import and trade balance data for September may reflect some of the economy’s slowing demand after the former hit a record in August and the latter posted an all-time deficit.

Look for the country’s third-quarter GDP report to show output slowed from the blistering pace seen in April-June, while easily remaining the region’s hottest big economy.

Among Group of 20 economies, only Turkey’s annual inflation of 85.51% exceeds Argentina’s 83%. Data posted Friday in Buenos Aires may see the two swap positions, but if not then, most economists see it happening by year-end.

–With assistance from Andrew Atkinson, Vince Golle, Robert Jameson, Malcolm Scott, Monique Vanek and Sylvia Westall.