Economic outlook: Credit crisis remains a key cause for concern

Economic outlook: Credit crisis remains a key cause for concern
By Chris Flood

Published: December 9 2007 20:04 | Last updated: December 9 2007 20:04

The credit crisis has tightened its grip on financial markets towards the end of the year. Money markets are continuing to show signs of severe strain as banks face many requests for funding but remain reluctant to lend.

The one-month dollar London interbank offering rate (Libor) has risen by 59 basis points since mid-November, suggesting that financial conditions have become more difficult in spite of policymakers’ efforts to increase liquidity.

The Federal Reserve is expected to cut US interest rates tomorrow and the only uncertainty appears to be whether the reduction will be a quarter or a half point. But mounting fears about the possibility of a US recession mean the Fed faces an uphill struggle to restore investor confidence.

US retail sales data for November, due on Thursday, will be key. The consensus forecast is for a rise of 0.5 per cent on the month, which would only slow the year-on-year growth rate from 3.7 per cent in October to 3.5 per cent.

High petrol prices will have an impact on US inflation data for November, due on Friday, with the headline measure expected to rise from 3.5 per cent in October to 4.1 per cent. Core consumer price index inflation is forecast to increase from 2.2 per cent to 2.43 per cent. US industrial production, also due on Friday, is forecast to show a rebound after a weak October, with the year-on-year growth rate rising from 1.8 per cent to 2.3 per cent in November.

In the UK, the goods trade deficit hit a record £7.8bn in September, suggesting the strong pound and slowing global growth are starting to weigh on UK manufacturers. The consensus forecast for the headline trade balance is for an improvement from £5bn in September to £4bn in October, due on Tuesday.

Wednesday brings labour market data, with the ILO unemployment rate forecast to remain unchanged at 5.4 per cent in October, but survey measures suggest employment levels could start to fall towards the end of the year.

Headline earnings growth is expected to edge up from 4.1 per cent in September to 4.2 per cent in October. The Bank of England will keep a wary eye on the extent of any upward pressure on earnings growth.

The UK housing market is expected to show further evidence of weakening in the Royal Institution of Chartered Surveyors’ survey for November, due on Thursday.

More surveyors are expected to report falls in house prices and new buyer enquiries are expected to decline further. The credit crisis is making it difficult for lenders to obtain adequate funds to finance new mortgage business.
Copyright The Financial Times Limited 2007