• German trade surplus to increase again
• UK industrial production to post mild gain
• UK external deficits at pre-ERM crisis levels
Today’s data calendar is light. After the European Central Bank’s meeting yesterday, which promised policy action in June (if still warranted), the next important event will be euro area’s April consumer price index on Thursday, May 15. Stock markets are struggling at important resistance levels and the EURUSD posted a possible reversal day, so technical trading and the few European data releases should drive the day.
As Portugal is about to exit its bailout programme, there might be some interest in possible credit rating changes today by S&P (BB, negative) and Moody’s (negative, Baa3). At 10:00 GMT, the European Central Bank announces the 3-year LTRO repayments, and large repayments could be taken as a sign of decreasing liquidity.
Germany March Current Account, Trade Balance (06:00 GMT): The trade surplus is expected to show an increase to 16.6 billion euros from previous month’s 15.7 billion. The surplus had recently been trending down for several months, due to the slow patch in the global economy, but should now be picking up steam. As trade balance is a large part of the current account, and according to the EU process of dealing with macroeconomic imbalances, Germany is in violation of the six percent current account surplus maximum limit.
In fact, Germany has been in violation of the limit since 2007, but so far has not received any sanctions from the European Commission. The German government has promised to do something about the problem, but so far not much has been done. In essence, Germany is not adhering to the commonly agreed checks and balances, and neither is Brussels. Should the Germany’s trade surplus begin to balloon again, it will become much harder to pretend that there is no elephant in the room. See Reuters, Open Europe for more.
UK March Industrial Production (08:30 GMT): Manufacturing output is expected to show an increase of 0.3 percent from February, or 2.9 percent from year ago. The increase in February was surprisingly large 1.0 percent, so a more moderate reading in March is not changing the overall positive trend at all, and should be viewed as a return to the mean. Note that the purchasing manager index also declined slightly in March, but in April rose near to the November highs, suggesting that manufacturing production is set to continue robust growth in the coming months. The purchasing manager index had been falling before April for several months, as China’s cooling economy and the bad weather in US had led to a slump, but that seems to be behind us now.
The International Monetary Fund has recently increased the UK’s growth forecast for 2014 to 2.9 percent, and the economy is expected to reach pre-crisis size by mid-year. With UK economic growth strongly outpacing the euro area, the GBP has been strengthening for couple of years now, erasing roughly half of the loss in value the currency went through at the onset of the financial crisis. Currently the EURGBP pair is near the January-February lows, and a break lower could accelerate the trend.
There is a sort of tug-of-war going among the decision-makers. The government wants to increase budget savings now that the times are better, the Bank of England wants to keep monetary policy easy and many are worried about the frothy housing market and the possibility of a bubble. The central bank is getting increasingly worried about the inflation outlook, but has been saved from interest rate hikes by the euro area’s disinflationary slump. Should the euro area improve just a little bit, it could be enough to push UK’s inflation expectations higher and force the Bank of England to get ahead the curve and tighten monetary policy. And that seems to be what the market is betting right now.
UK March Trade Balance (08:30 GMT): The March goods trade deficit is expected to narrow slightly to 8.8 billion GBP from 9.1 billion GBP in the previous month. Essentially the deficit is just oscillating between 8 and 10 billion GBP, and there are no signs of the situation reversing any time soon. The Bank of England has stated it is concerned about the continuing external deficit, of which goods trade is only a part.
The current account deficit is now around 5.5 percent of the gross domestic production, and such levels were last seen in early nineties right before UK was forced to leave the European Exchange Rate mechanism, float the GBP and allow it to devalue. While the UK’s source of external financing is in no way in danger at the moment, the deficit is a sign that the economy has not rebalanced properly, and is mainly driven by consumption, services, and real estate – all of which can be fickle.
Indeed, the UK’s current account deficit is on par with countries like Ukraine, Turkey and South Africa. That should ring some alarms, and while the markets and policymakers have for years been forgiving of UK’s external deficits, after the recent experiences of capital flow “sudden stops”, the priorities could change quickly. Usually, external deficits are solved by slower growth and weaker currency. It could very well become the Bank of England’s next focus.
