Autumn Statement in bleak mid-winter

• The UK Autumn Statement is the main focus this week, with an MPC decision to follow  
• The ECB announcement is likely to maintain the status quo in a busy week for central banks  
• US payrolls and ISM provide last significant data ahead of fol lowing week’s FOMC  

Autumn Statement sees UK focus ...The coming week sees key international events with the ECB, RBA and Bank of Canada interest rate announcements; euro group finance ministers meeting; key US data, including the latest payrolls and ISM indices; and Chinese PMIs. But for us, Wedensday’s Autumn Statement takes centre stage, although December's MPC announcement and related monetary policy releases and important domestic data will also be monitored closely.

Weaker growth pushes deficits higher ... The Autumn Statement has been eagerly anticipated since the summer. Although much of the reported deterioration in the current year's public finances has been revised away, the main theme of this Autumn Statement looks set to be the weakness of the economy and its impact on the borrowing profile. We forecast the 2012-13 budget deficit to come in around £105bn (£92bn forecast in March). Moreover, likely downward revisions to future GDP growth forecasts could see an additional £100bn of borrowing over the next five years, assuming unchanged policy.

Chancellor breaches fiscal target?... There has been much debate about the transfer of APF assets, but the immediate impact on the fiscal position, ahead of an official classification decision in January, will depend on the OBR’s assumptions. The OBR has stated it expected the tranfers would impact on net debt and net borrowing. Our central forecast has, for some time, been that the Chancellor would miss his supplementary target - to see debt: GDP fall before 2015-16 based on current policies. Indeed we do not expect the Chancellor to step up austerity measures in this Statement to address the prospect of a miss. However, the expected creation of the Homes and Communitites Agency, a body designed to centralise and accelerate the sale of government land and buildings, could see changes in asset sale forecasts. There is also the possibility of a number of other superficial reprofiling measures that could be employed to avoid an actual breach. 

MPC on hold this month ... The following day the MPC announces its last monetary policy decision of 2012. Last month's decision to let QE expire was, in part motivated by a near £60bn of expected APF fund transfers over the coming three years, which the MPC described as having similar effects to QE (equivalent to an APF target of £435bn?). This month's expected decision to leave policy unchanged is likely to be straightforward for most members. Whether further QE will be necessary in 2013 is now a close call and will depend on downside risks from Europe and the US not materialising and a pick-up in activity early next year. Monday’s disclosure of Funding for Lending Scheme details will inform the MPC’s decision. Over time, the FLS should help to steer credit growth higher, with the jump in the latest mortgage approvals perhaps an early sign of this. Also this week, we expect a rise in PMIs and industrial activity to bolster sentiment.

ECB still on hold, but forecasts soften ... The ECB remains in pre-OMT paralysis and we expect no further policy measures to be announced next week. Yet updated medium-term growth forecasts are likely to be revised lower, highlighting the need for further stimulus. We expect further easing following activation of the OMT next year, albeit that this would be the most effective boost the ECB can deliver for now.

US releases to inform next week's FOMC... Key US releases, including payrolls and ISM surveys, should show some impact from Hurricane Sandy. Nevertheless, they provide the last news ahead of the following week's key FOMC decision.

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