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Week Ahead: firepower, recession and volatility

Our look ahead at the main financial events of the coming week.

 
Week Ahead: firepower, recession and volatility

The UK may return to recession, authorities in the US and Japan could signal more de-facto money-printing, and events in the eurozone – where the French elections are about to begin – could provoke more market tantrums.

Zigzagging in and out of recession

Ahead of economic growth data for the first quarter, economists are divided as to whether the UK has in fact fallen back into a double-dip recession. Concerns about weak construction activity in particular have pushed some forecasters towards a negative growth prediction, following the 0.3% decline in GDP in the last quarter of 2011.

They are grappling with conflicting data signals, though Nomura’s Philip Rush notes that in the last week: ‘The labour market and retail sector gathered more positive pace, inflation ticked up and the MPC appears to be backing away from QE.’ He expects growth of 0.2% in the quarter, averting recession. Others aren't so positive.

Whatever happens, the economy will be prone to relapse over the coming months – Mervyn King’s economic ‘zigzag’– in the face of such difficult and unpredictable global conditions.

And in any case, Wednesday’s figure will be subject to further revisions as more data comes in. But if it is negative then the damage will be done, with doom-laden double-dip newspaper headlines.

Amid a disappointing, but hopefully temporary, halt in the decline in inflation – with CPI measuring 3.5% in March – policymakers’ ability to tackle this slowdown is limited.

American waiting game

In the US, where growth has been surprisingly strong over recent months, a first-quarter GDP reading is expected to reflect a slight loss of growth momentum compared with the last quarter of 2011.

More important than backward-looking GDP figures, though, will be any indications of further help from the US Federal Reserve's decision-making committee, the FOMC, when it meets this week, with that less upbeat data feeding into its decisions.

Investors will be watching closely for further clues on future of the central bank’s quantitative easing (QE) scheme. Though QE3 is not expected to be announced at this week’s meeting, comments from chairman Ben Bernanke will be closely scrutinised, though he may provide little new information. 

‘It continues to be a waiting game for the Fed. Recent Fed speeches suggest that the threshold for further easing has not yet been met and it would be premature to expect any signals from next week’s FOMC meeting,’ said Aneta Markowska of Société Générale.

The Fed is at least likely to reiterate its expectation that interest rates will remain ultra-low until the end of 2014, economists say.

Bye bye Sarko?

Concerns remain that financial markets aren’t reflecting the risks posed by the French elections, with the first round due this Sunday.

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