Real Change In Euro Area's Q3 GDP Not Anticipated

Economists don’t anticipate a change in today’s final read on the euro area’s third quarter GDP relative to last month’s preliminary “flash” release, which reported a 0.1% decline vs. previous quarter. But after yesterday’s much-weaker-than-expected retail sales report for the EU in October, there’s less confidence about what comes next. And just to keep things interesting, there are monetary policy announcements scheduled today for European Central Bank and the Bank of England.

Eurozone GDP (10:00 GMT) Today’s revised Q3 GDP report is expected to show a 0.1% decline for the eurozone economy—unchanged from the previous Q3 estimate. That may be too optimistic, according to the soft numbers in recent months for the Markit Eurozone PMI Composite Output Index. The purchasing managers index for Euroland through September has fallen considerably harder relative to the downtrend for GDP. But PMI metrics are more volatile than GDP data and so the comparison is only a rough guide for estimating how the real economy fared.

One reason to remain cautious, however, is yesterday’s sharply disappointing retail sales report for Europe. The dramatic 1.2% drop for October is a new hurdle for Q4, but Eurostat’s update also revised September’s profile down to a steeper 0.6% decline in retail trade from the previously estimated 0.2% drop. Consumer spending in Euroland ended Q3 on a significantly weaker note than we were told a few weeks ago, and the deeper deterioration may show up into today’s GDP revision.

BOE Announcement (12:00 GMT) The Bank of England has kept its policy rate at 0.5% for nearly four years and the odds are low that we’ll see any change today. The UK economy looks relatively strong in the rearview mirror — Q3 GDP rose 1%, thereby ending Britain’s recession. But the outlook for Q4 is considerably weaker. Nonetheless, the monetary focus at the moment is skewed toward inflation worries, thanks in part to the 2.7% annual increase in consumer prices through October vs. 2.2% in September.

But the outlook for monetary policy is increasingly uncertain, especially after yesterday’s forecast from the Office for Budget Responsibility, the group that crunches the numbers for the government. OBR projects a 0.1% decline in GDP for Britain in the fourth quarter. That’s in line with other forecasts these days, but it’s still a slap in the face after Q3’s 1.0% GDP pop that ended the country’s recession. It’ll be interesting to see how—or if—the BOE’s monetary policy committee reacts to OBR’s downgrade of its economic outlook.

Most of the uncertainty about monetary policy for Britain for now centers on the timing for adjusting, or scrapping, quantitative easing—the asset purchasing program that’s intended to juice the economy. With inflation running moderately higher, there’s pressure from some corners to nip QE in the bud. That’s a mistake, many analysts warn. Regardless, former BOE official Adam Posen expects that QE will be on hold “indefinitely.” But with the bias for the economic outlook tracking slightly negative these days, one might wonder if there’s an attitude adjustment coming.

ECB Announcement (12:45 GMT) The euro region has the highest interest rates and the weakest economy compared with Britain and the US in terms of central bank target rates. But the status quo is still expected to prevail in today’s ECB meeting, even though that’s a harder line to defend after yesterday’s news that eurozone retail sales slumped a suprisingly deep 1.2% in October, mostly due to weak demand in Germany. The crowd still anticipates that the ECB will hold its target rate at 0.75%, but fewer analysts think that will hold in the months ahead.

One of the arguments against further cuts has been Germany’s relative strength. But Europe’s largest economy suffered a surprisingly large 2.8% drop in retail sales in October--more than double the decline for the euro region overall. Even if the ECB doesn’t ease policy today, the central bank will release new economic projections, which may provide clues about when--or if?—there’s a new round of easing coming. My TradingFloor.com colleague Juhani Huopainen has written a very good preview of today's ECB decision, and he will be live-blogging today when the ECB news is released.