Politics and austerity cloud global growth outlook

• China Q3 GDP will keep focus on global growth developments.  
• Surveys to start shaping the outlook for Q4.  
• UK public finances to point to ongoing deterioration in outlook.  

Focus on global growth and austerity ... The IMF’s reports this week have left markets focusing squarely on the global growth outlook and the implications of fiscal consolidation plans around the world. The coming week is likely to reinforce this interest. First estimates of Chinese Q3 GDP will indicate the momentum in this dominant emerging market. The EU leaders’ Summit will likely add to the debate about austerity and other policy measures for Greece and the wider Euro area. Domestically, September’s public finances will be watched closely as the debate over fiscal austerity continues.

China posts Q3 GDP ...The Chinese economy becomes the first major economy to post Q3 GDP over the coming week. Consensus forecasts suggest the economy will continue to accelerate, rising by 2.0% up from the lacklustre 1.6% pace seen in Q1. This would reflect some reaction to monetary stimulus, both conventional and non-standard in the first half of this year. Our global team is more circumspect, pencilling in 1.8% and expecting the acceleration to be recorded later in the year.

Surveys to hint at Q4 growth ... Developed economies growth outlooks will also be shaped by the first of October’s business surveys. Our global team forecasts an improvement in the German ZEW survey in October, reflecting the sharp rise in sentiment recorded after the ECB’s recent policy announcements. However, we are less sanguine about the outlook for the US surveys. The recent Beige Book specifically warned about the outlook for manufacturing in key regions and we see the Empire State survey rising only modestly from last month's 31/2 year low and the Philadelphia Fed survey reversing some of last month's gains. These would suggest that the weaker global environment is weighing on US manufacturing. 

EU leaders’ Summit ... Political developments continued to cloud the global outlook. The EU leaders’ Summit at the close of the coming week will help gauge how supportive European political developments are likely to be. The Summit’s agenda is broad-ranging, including discussing the contentious issues of banking union and direct banking sector recapitalisations; stricter fiscal oversight; and a centralised euro area budget. The history of the crisis has been a series of economic solutions that have subsequently floundered on political difficulties. Markets will fear a repeat from the upcoming meeting.

UK public finances in focus, but monetary policy to remain accommodative ... The coming week sees a number of key releases from the UK. The focus on austerity has led some to question the UK’s plans for deficit consolidation. Questions are likely to mount as we forecast another deterioration in the public finances in September. These will be the penultimate figures before the December Autumn Statement and are likely to show the underlying finances some £14bn worse than a year ago. While these raise questions about the UK’s path to debt reduction, the minutes of October’s MPC meeting are likely to continue in September’s broad vein. We suspect that some Committee members are not as convinced of the efficacy of QE as others. Nevertheless, with the FLS expected to take some time to take full effect and global growth prospects deteriorating, we expect some members to continue to believe that more easing is 'more likely than not'. We expect the minutes to point to further QE in November (we expect £50bn). Moreover, the expected drop in inflation and pick-up in unemployment in the coming week's other key reports should add to this view. The IMF also noted that a key characteristic of long-term debt reduction was supportive monetary policy. The MPC looks set to continue to play its role.

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