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FTAlphaville had a post yesterday about ‘missing GDP' in the US. A couple of key points to note were:

• the main reason for a slower-than-average recovery is weak consumer spending
• exports have outperformed so far, but this may not continue as they are vulnerable to global growth

This is not so far from the UK’s position, either. The graph below shows total GDP growth, which has lagged behind previous recessions...

...But, as the next graph shows, if we exclude household spending, a different pattern emerges, with growth at a roughly similar pace to that following previous recessions.

Given the weakness in the labour market, and households’ desire to pay down debts, this will not come as a surprise. It is also unlikely that household spending will improve much this year.

Although GfK NOP’s consumer confidence indicator moved up to a six-month high today, it remains subdued by long-term standards, and there is little indication so far that this has translated into increased spending. However, whilst subdued consumption clearly reflects a degree of economic stress, ‘rebalancing’ the economy does require less growth coming from household spending, and more growth from exports and investment.

In the UK exports have continued to grow but, as FTAlphaville point out, they are particularly vulnerable to global growth. The UK’s exposure to the Eurozone is therefore a key issue for the year ahead.

However, UK manufacturers – who account for around half of total exports – are relatively positive about their export potential in the year ahead. As our Executive Survey showed, over four fifths of manufacturers expect export sales to be the same or greater in the year ahead. Key to this, UK manufacturers are targeting non-traditional markets, seeking out the new growth opportunities that exist there.

The Bank of England’s Monetary Policy Committee voted unanimously to maintain the base rate at 0.5% and continue with the asset purchase programme up to a value of £275bn.

Some members felt that the risk of inflation falling below target meant that further asset purchases were likely to be required in the future.

Financial markets

• More positive news from US may have supported markets, but this will have been countered by continuing problems in the euro area
• Short term interest rates little changed in the UK, but fell in the euro area, reflecting the ECB’s policy rate reduction in December
• Equity markets improved on the news of the ECB’s rate reduction

International economy

• Euro area growth was weak, at 0.1%, in the third quarter of 2011, with core countries showing weakness too
• US starting to look more positive with fourth quarter growth likely to be around 0.8%
• Emerging world activity slowing, but no sign of a sharp fall
• Commodity prices rose slightly over the month

Money, credit, demand and output

• ONS estimates showed GDP grew 0.6% in the third quarter, but fourth quarter likely to have been weak, with some data implying contraction (ONS’s first estimate for the fourth quarter was out today and showed a contraction of 0.2%)
• Recent surveys suggest a modest pick up in December that could continue into the year ahead
• Latest indicators of consumer spending growth were mixed, but confidence still depressed
• Goods exports grew sharply in October, and did not fall back as much as expected in November
• The way firms responded to the sustained period of weak domestic demand would affect how quickly the economy recovered. The Bank noted some signs of a weakening in investment intentions.

Supply, costs and prices

• CPI inflation fell to 4.2% in December, and input prices fell 0.6% in December
• Path of CPI inflation since September had matched the Bank’s central expectations
• Seen some aggressive discounting on the part of retailers
• Slack in the labour market and its impact on wages remains a key factor in the future path of inflation, so far there is little evidence that 2011’s high inflation had led to rapid wage growth.

Overall, the broad outlook for inflation was seen as similar to that presented in November’s inflation report, though speed and extent of the fall in inflation was less certain.

For manufacturers, 2011 was a year of significant upward pressure on input costs.

But in the last couple of weeks, data releases on consumer prices and producer prices would suggest that inflation is now starting to come off the boil. The year to December saw the slowest annual increase in producer input prices since October 2010.

High and volatile input prices can cause significant problems for manufacturers, so it is good news that price pressures are starting to ease. However, since the global recovery began, another problem has emerged: that of availability.

Over 80% of manufacturing executives said that a shortage of raw materials was a significant risk in 2012.

Our survey of manufacturing executives found that concern about the availability of raw materials is pervasive, across all sizes of business and industry sectors. In fact raw material shortages are such an issue that two thirds of companies saw this as the top risk to their business plans in the year ahead – considerably more than any other issue.

Why is this?

While some risks may dent growth, or cause less concrete knocks to business, being able to business, being unable to secure or fulfil orders, or having to run below optimum capacity are real and tangible outcomes that can arise quickly when there is a lack of raw materials. 

Outlook for prices and availability

Slower global growth as a result of the Eurozone crisis and the Chinese government’s attempts to engineer a ‘soft landing’ may have abated pressure on input prices, but availability and price of specialist materials such as metals and rare earths remain an issue.

The weaker economic outlook may alleviate commodity prices, but with global demand for inputs continuing to rise, the issue of raw materials prices and shortages is set to be a perennial one.

Today’s labour market statistics do not make particularly comforting reading. One key measure, the ILO unemployment rate, edged up to 8.4%. Unfortunately, we expect that figure to continue to rise: averaging out at around 8.6% over the course of 2012.

The economic uncertainty resulting from the Eurozone crisis that overshadowed much of the second half of 2011 is likely to affect hiring decisions in the year ahead. And while positive balances of manufacturers intend to take on both temporary and permanent workers in 2012, this is highly dependent on the sector.

Some sectors, particularly Transport (which is more exposed than most to emerging markets), are more positive about taking on new employees in the months ahead, whereas a balance of Rubber and Plastics manufacturers expects to reduce headcounts of both temporary and permanent workers.

In addition, while companies often report positive recruitment intentions, these can sometimes be frustrated by skills shortages, which are a long-term issue for the sector.

The labour market statistics also showed that the number of working days lost to labour disputes was its highest level since July 1989. Although this number was skewed by the large public sector strikes on 30th November 2011, deterioration in workplace relations has been raised as a concern by some manufacturers.

Similarly, after a couple of years of pay restraint, companies are concerned that they will face significant pressure on pay, which – at a time when materials and other input costs remain elevated – could put additional pressure on margins and profitability.

So far manufacturers and their employees have worked together to ensure good workplace relations. During the downturn this resulted in fewer job losses than have previously been seen in recessions. Reflecting this, many manufacturers see maintaining good lines of communication with employees as a crucial activity in the year ahead.

Tomorrow the Bank of England's Monetary Policy Committee will announce its first decision of 2012.

Although CPI inflation currently stands at 4.8% it is highly likely to fall below target in the latter half of 2012. A rate rise now seems firmly off the table.

In fact, in many ways, a boost to the asset purchase program (a.k.a. QE) now seems increasingly likely. The ongoing Eurozone crisis is affecting the real economy. Not only have export orders looked weaker in recent months, but the uncertainty generated by the crisis has led to some companies holding off on investments. More recently there are signs that the crisis is putting strains on the banking sector, both at home and in the Eurozone, which could cause further problems with access to finance.

That said, it is unlikely that the Bank will chose to increase asset purchases tomorrow, not least because the current round of purchases is not yet complete. If a decision is made to loosen policy further it is more likely to come in February, following the Bank’s Inflation Report which will contain its next round of forecasts. We’ll also have a bit more data around how the last few months of 2011 looked.