Economic Outlook: Darling’s balancing act

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By Keith Fray

Published: December 6 2009 17:54 | Last updated: December 6 2009 17:54

Alistair Darling, UK chancellor of the exchequer, faces an unenviable balancing act when he presents his pre-Budget report on Wednesday.

Mr Darling has to reassure investors that the government has a credible plan to restore the public finances to a sustainable path, so he will flesh out the government’s commitment to halve the deficit by 2014, as promised in the recent Queen’s speech.

However, he must do this without harming the fragile recovery – the UK is the only Group of 20 country still officially in recession – and he will also hope to boost the Labour government’s political prospects. With a general election only months away, reports from Treasury insiders indicate that Mr Darling will opt to maintain spending in the short term and increase taxes on the wealthy. He is likely to admit the economy contracted 4.75 per cent this year – over 1 percentage point more than forecast in April’s Budget – while leaving forecasts for next year unchanged; gross domestic product growth is estimated at between 1 and 1.5 per cent.

UK industrial production data for October, due out tomorrow, will underline the muted nature of Britain’s recovery. Last week’s manufacturing purchasing managers’ index unexpectedly fell back, and analysts expect manufacturing output to have risen only 0.3 per cent during the month, with a slightly higher rise in the wider industrial production series.

Similar data for German industrial production, also out tomorrow, are expected to show a rise of 1 per cent.

The main release in the US is retail sales for November, published on Friday. This should give a clearer view of the outlook for consumer spending now that the “cash for clunkers” car scheme has ended.

Preliminary sales results from the Thanksgiving holiday weekend, traditionally the start of the Christmas shopping season, showed more shoppers but with a lower average spend than last year, as consumers sought bargains. Overall sales are expected to have risen 0.6 per cent last month, up 0.5 per cent excluding automobile sales.

Friday sees a raft of economic figures for November from China. Industrial production is expected to have risen at an annual rate of 18 per cent, although this partly reflects weak activity last year. The authorities are likely to wait until stellar growth rates in investment, industrial output and particularly exports are re-established before acceding to persistent demands from trading partners to allow the renminbi to appreciate.

A calendar of key statistical reports due out over the next seven days from Informa Global Markets

Central bank meetings are being watched for indications of changes to monetary policy or that exit strategies from the exceptional policies of the past year are becoming clearer.

The Bank of England will probably leave interest rates and the asset purchase scheme unchanged at Thursday’s meeting, but the equivalent announcements from the Canadian and New Zealand central banks, on Tuesday and Wednesday respectively, might signal that these countries are moving closer to Australia’s lead in raising rates as the economic outlook improves.

In Japan, a large revision is expected to third-quarter GDP growth when the final estimate is published on Wednesday. The initial report of 1.2 per cent growth is likely to be scaled back to 0.6 per cent, with a fall in fixed investment during the quarter thought to be primarily responsible for the revision.

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