Attention will immediately shift to the May meeting where the odds of another increase in 'quantitative easing' have shortened somewhat. This reflects a fairly disappointing run of data releases in recent weeks: Q4 GDP growth was revised down (-0.2% to -0.3%); retail sales data for January and February were weak; and the unemployment rate edged up to 8.4%. Rising oil prices are also a worry, with Brent crude continuing to trade above $120/barrel. But it hasn’t all been bad news. The purchasing managers’ indices (PMI) for manufacturing and service sector activity in March were both relatively upbeat and suggest the UK avoided the dreaded “double dip” recession in Q1. Even so, we still expect another £50bn increase in the asset purchase programme, though May might be too soon and it may not occur all in one go.
UNITED STATES: The Federal Open Market Committee (FOMC) made no policy changes at its March meeting, and is expected to adopt the same stance when it meets later this month. Recent improvements in the labour market have led some to conclude that the Fed might change tone towards more optimistic language about the US economy in 2012 and 2013. But there is no evidence of this happening yet. Ben Bernanke, chairman of the Federal Reserve remains particularly cautious. In a recent speech he warned that the rapid pace of job creation was at odds with the relatively slow increase in economic activity. He pointed out that recent falls in unemployment have come from fewer people being laid off. While welcome, a stronger recovery indicator would be if the driver was more people being hired. Moreover, minutes of the FOMC’s March meeting show that only one member was prepared to vote against the statement that interest rates would remain exceptionally low "at least through late 2014”. Other gauges of economic conditions suggest things are improving. Inflation dropped by another 0.1% to 2.3% in February and firms again reported expansion in the Institute for Supply Management (ISM) surveys of business sentiment. The manufacturers’ score for March recorded a solid increase to reach 53.4, up from 52.4 in February, and though the services ISM softened to 56.0 the sector continues to expand at a good pace. This is all good news, but it will need to remain so to convince Bernanke that the recovery is here to stay.
EUROZONE: The European Central Bank (ECB) left interest rates on hold at 1% for the fourth consecutive month at its April meeting. The Governing Council decided to stick to its “wait and see” strategy in the hope that the banking system, which received over €1trn of liquidity from the ECB, will increase lending to households and corporates to help the region’s recovery. But at present, the recovery remains a distant dream with recent PMI data showing further declines in economic activity across the services and manufacturing sectors. Moreover, the crisis web is spreading ever wider, with negative readings in Germany. The bottom line is that the Eurozone is heading towards a technical recession (two consecutive quarters of negative GDP growth) as policy makers struggle to engineer growth amidst the burden of austerity.