Over to you Mr Bernanke?

• Global growth concerns remain in focus with IMF expected to lower its growth outlook.  
• Fed Chairman Bernanke’s monetary testimony likely to raise expectations of Fed stimulus.  
• UK data to leave outlook unchanged; with stimulus in place authorities now wait and see.  

This week markets focused on global growth with key central banks tweaking and easing policy as signs of more subdued activity emerged. Today’s Chinese GDP marked the lowest annual growth rate since early 2009 at 7.6%. However, we note that the quarterly rate accelerated in Q2 (1.8% from 1.6%). With easier credit conditions this year and central bank easing across H1 2012, Chinese growth should have passed its nadir, although further policy easing is likely in the short term.

Global growth will remain in focus next week. Monday will see the IMF publish updates to its global growth forecasts. It had expected to see 2012 growth of 3.5%, but IMF head Lagarde indicated this is likely to be lowered. Our global team forecasts growth to fall short of this and downgraded their own estimate to around 3.2% reflecting slower activity in key economies.

With central banks adjusting policy across the globe, the spotlight falls on the Federal Reserve in the coming week, with Chairman Bernanke giving his semi-annual monetary policy testimonies to Congress on Tuesday and Wednesday. This week’s FOMC minutes noted slower global activity, mentioning China specifically, and showed a Committee prepared to undertake further stimulus if economic conditions deteriorated. Empire and Philadelphia Fed surveys on Monday and Thursday will help gauge the scale of deceleration in Q3. We forecast a mild improvement in both as the positive effects from weaker gasoline costs begin to be felt. However, Wednesday's Federal Reserve Beige Book report is likely to show evidence of softer domestic activity in light of a weaker global economy. Moreover, with US President Obama renewing the focus on the 'fiscal cliff', business sentiment is likely to remain subdued. Fed Chairman Bernanke's testimony is unlikely to be upbeat. Given a freehand, we suspect Mr Bernanke would restart QE tomorrow. However, he is likely to be more balanced over the prospects and merits for policy. But without a decent rebound in surveys and sales, expectations for more QE could start to grow.

UK authorities have already provided stimulus to the domestic economy and today’s ‘funding for lending’ announcement will continue to be digested next week. Our early impression is that this is unambiguously positive for the economy. Economic releases are unlikely to reshape the outlook for the economy. June’s retail sales are likely to show that record rainfall washed away most of the Jubilee celebrations boost from the high street. With poor weather continuing in July, the outlook is for subdued spending ahead of any potential Olympic lift. Unemployment also looks set to increase further, with last month’s 8.1k rise likely a harbinger of more job losses to come. We forecast a further 10k rise in June. While Friday’s news on the public finances is not expected to show a further deterioration, this is likely to be of little comfort after the disappointing start to the fiscal year. We will await July’s MPC minutes to gauge the Committee’s economic outlook. With stimulus in place and economic data likely to be distorted by one-off effects over the coming months, the MPC is likely to sit back for now and see how the economy evolves. However, with global activity likely to remain subdued, we expect the MPC to provide further stimulus come November and beyond.

Euro area developments remain the epicentre for global softness. Tuesday's German ZEW survey is likely to provide further evidence of economic weakness spreading to the heart of the currency union. Downgrades to the Italian sovereign rating today compound concerns. However, it is noteworthy that Italian, Spanish and Irish bonds have retained a firmer tone, offering some hope that, for now, an escalation of the euro area crisis reamains at bay.

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