US and UK Q1 GDP weakness in focus

• Queen’s speech to confirm PM Cameron’s intention of holding an EU referendum
• Greek uncertainty to linger pending key events after the coming week
• Weakness in UK and US Q1 GDP to be reassessed

European event risk remains at large. Uncertainty around the release of Greek bailout funds remains elevated despite ongoing discussions between Merkel, Hollande and Tsipras at this week’s EU Summit in Riga. However, with the emphasis still on delivering a complete set of measures to resolve the impasse in negotiations, discussions are set to continue over the coming week, with the possibility of an extraordinary Eurogroup meeting at some point. With Greece’s finances still in a precarious state, comments from Greek officials have suggested that failure to reach an agreement would mean that the 5th June payment to the IMF is unlikely to be met. That would raise the risk of Greek becoming the first country to default on an IMF payment. 

Queen’s speech to reiterate Cameron’s commitment to EU referendum. While comments from French President Hollande noted that the EU Summit in Riga was not the appropriate place or time to discuss the UK’s membership, the anticipation of an EU referendum remains a key source of uncertainty to the UK outlook. While the surprisingly definitive outcome to the election has removed a large element of political uncertainty, the absence of a coalition partner as an offset to the Conservative’s ambition, presents the UK with a key challenge in the shape of its ties with the EU. The Queen’s speech on Wednesday is expected to confirm PM Cameron’s intention of holding a referendum by end-2017, although any firming in the timing of this is likely to remain elusive at this stage.

UK GDP to be nudged modestly higher while surveys to point towards a firmer outlook. The flow of economic data over the coming week is unlikely to materially alter the current perceptions of the UK economy. The preliminary estimate of Q1 GDP underwhelmed expectations printing at 0.3% q/q. We expect the second estimate (Thurs.) to be revised up to 0.4%, although this would still be below the level of activity implied by the much firmer tone of Q1 business surveys. The expenditure breakdown will be examined to see if household spending continues to provide the lion’s share of propulsion as suggested by the recent strength of retail sales. To the extent that the weakness in Q1 GDP growth could reflect a reduction in inventories, officially measured growth should better reflect the trend implied by surveys in Q2. On Friday, the Lloyds Business Confidence Barometer and GfK Consumer Confidence for April, will provide additional insight into prospects for Q2. 

US Q1 GDP to be revised lower. As in the UK, scepticism over the reported weakness in Q1 activity has been widespread in the US following the weaker-than-expected preliminary GDP print last month. The extent to which this slowdown reflected statistical quirks related to seasonal adjustments rather than a genuine slowdown in underlying activity remains a key point of debate. While this uncertainty has received a lot of attention, the flow of data since the first estimate, in particular a large March trade deficit, points to the likelihood of a further downgrade. The second estimate of growth on Friday is expected to be revised down into negative territory. Over the rest of week, data releases including durable goods orders for April and consumer confidence for May, both on Tuesday, should help shed further light on the prospects for a Q2 rebound. Given the dollar’s sharp appreciation in recent months, domestic demand is likely to mostly shoulder the burden of growth, implying particular interest in the fundamentals driving consumer activity. New home sales data (Tues.) will provide a further update on the strength of the rebound in that sector.