The main message from the Bank of England's May Inflation Report, which was published last week, was that the UK economic outlook remained very uncertain. We agree with this, as while recent data have provided some optimism that the pace of decline is moderating, output is still falling and the sharp pick up in unemployment makes it difficult to be confident of a swift return to growth. We expect confirmation on Friday that UK real GDP contracted by 1.9% in the first quarter of this year, the biggest since Q3 1979, driven by falling services output, with manufacturing also collapsing by the most on record. The first view of the expenditure breakdown is expected to show consumer spending fell by 1.5% in Q1 2009, following on from a 1% fall in the previous quarter. Although retail spending has held up surprisingly well, spending on consumer services and vehicles is under severe pressure, while rising unemployment and falling household incomes do not suggest a turnaround can be expected anytime soon. Gross fixed capital formation is also likely to show a sharper drop compared to the previous quarter, reflecting falling business investment and further declines in housing-related investment. Aggressive de-stocking, as companies adjust inventories for the potential sharp fall in demand, is likely to have remained a significant drag on overall GDP in the first quarter. However, its effect should ease in coming quarters, primarily reflecting the fact it has been much more severe than in previous recessions.
Further information on economic activity in Q2 will be provided by data on retail sales and industrial activity this week. The ONS confirmed last week that a change to their methodology will result in lower estimates of the volume of retail sales. The data for April are published on Thursday. The headline total orders index of the CBI industrial trends survey is expected to show conditions remained challenging in May, indicating that recovery is unlikely in Q3. Inflation data on Tuesday are likely to show further declines in annual rates for CPI and RPI, however monthly rises could be quite strong, in part reflecting
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