Discussions over tackling the euro area's debt crisis are expected to remain firmly on the table when EU finance ministers meet in Brussels this morning. Today's gathering comes hot on the heels of yesterday's euro area finance ministers meeting and looks to provide some clarity over the Greek bailout package ahead of next week's EU leaders summit. In terms of economic news, with expectations that euro area GDP contracted in Q4, market focus is now on economic activity in Q1 and the prospect of a euro area wide recession. Although, we look for both the 'flash' manufacturing and services PMIs to have improved in January to 47.5 (prev 46.9) and 49.2 (prev 48.8) respectively - they are expected to remain below 50.
The impact of the slowdown in Europe and its effect on the domestic economy is yet to have a visible impact on the UK public finances. In December, we forecast PSNBX to total £14.4bn. The underlying deficit is thus likely to narrow by £1.5bn on the previous year, broadly in line with the average improvement seen this financial year. This suggests the finances may undershoot the revised official PSNB target of £127bn - no mean feat against a background of weakening economic activity. This reflects a marked slowing in central government spending growth, which has slowed to around 1% on the year. The deficit improvement will provide ongoing support to gilts 'safe-haven' status. However, a fresh recession is likely to result in disappointing receipts growth as we move into 2012-13. Ahead of tomorrow's MPC minutes, Governor King will speak in Brighton this evening.
Improvement in PSNBX in 2011-12 (yoy)
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