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11/12/2009 | Inflation, Unemployment, Retail Sales, and Public Finances among Key U.K. Economic Releases for Week Beginning 14 December

Howard Archer

The forthcoming week is very heavy on economic data and survey releases. Inflation is likely to have spiked higher due to unfavourable base effects, while unemployment and retail sales data should maintain their recent improvement.

 

Annual consumer price inflation data (out Tuesday) are likely to show a further marked increase to 1.8% in November, after inflation climbed to 1.5% in October from a five-year low of 1.1% in September. This expected rise is primarily the consequence of very unfavourable base effects due to consumer prices falling month-on-month in November 2008, as oil prices continued to head down sharply from their July 2008 record highs. Stronger oil prices may have had some upward impact on inflation in November, while there could have been less discounting by retailers compared to a year earlier, when they were hugely concerned about sales prospects for Christmas as economic activity nosedived..

Core consumer price inflation is seen edging up to1.9% in November, from 1.8% in October. In addition, annual underlying retail price inflation is expected to have climbed to 2.6% in November from 1.9% in October. Finally, retail prices are seen rising 0.3% year-on-year in November, thereby bring to an end eight months of deflation on this measure, including a peak drop of 1.6% in June. This deflation was the consequence of mortgage interest payments being much lower year-on-year.

Consumer price inflation is likely to spike appreciably higher over the next few months as it is pushed up by ongoing unfavourable base effects resulting from the substantial falling back in oil prices in the final months of 2008 and early months of 2009, as well as last December's value-added tax (VAT) cut from 17.5% to 15.0% dropping out of the calculation. VAT will rise back up to 17.5% in January; consequently, consumer price inflation could very well hit 3.0% around March/April. However, we expect inflation to ease back thereafter as base effects become less unfavourable and underlying pressures are contained by substantial excess capacity, muted recovery, wage moderation, and the need for retailers to price competitively in the face of still-limited consumer spending.

Data out on Wednesday are expected to reveal that unemployment is still rising, but at a moderate rate. The number of jobless on the International Labour Organization (ILO) measure is seen rising by around 20,000 in the three months to October, which would be down from increases of 30,000 in the three months to September and a peak rise of 281,000 in the three months to May. This would take the number of unemployed on the ILO measure up to 2.5 million and cause the ILO unemployment rate to rise to 7.9%. Meanwhile, we expect claimant count unemployment to have risen by around 15,000 in November. This would compare to increases of 12,900 in October and 20,600 in September, and would be down from a record drop of 136,600 in February. This would take unemployment on this measure up to 1.654 million but leave the claimant count unemployment rate unchanged at 5.1%.

Despite the improved latest labour market data, the suspicion remains that modest job shedding will persist for some time to come. Even if the economy does finally return to growth in the fourth quarter, as seems probable, activity is still unlikely to be strong enough in 2010 to prevent further net job losses. Doubts and concerns over the strength and sustainability of any recovery are likely to encourage businesses to keep their labour forces as tight as possible. In addition, significant job cuts in the public sector could start next year as part of the efforts to rein in public expenditure. At least it now looks unlikely that unemployment will reach 3.0 million on the ILO measure, as had long been feared. We suspect the peak will now be around 2.75 million.

Average earnings are expected to have risen by just 1.3% year-on-year in the three months to October, as they were limited by reduced bonus payments. Furthermore, underlying average earnings have been under serious downward pressure from high and rising unemployment, elevated job insecurity, negative retail price inflation, and the need for companies to contain their costs in the face of still-muted demand and reduced profitability. Thus, annual underlying average earnings growth (excluding bonus payments) is seen remaining down at 1.8% in the three months to October, which is the lowest level since the series began in 2001. These earnings growth rates are substantially below the 4.5% level the Bank of England considers broadly consistent with its 2.0% consumer price inflation target.

Retail sales (out on Thursday) are seen rising by a solid but unspectacular 0.4% month-on-month in November, which would match the increases seen in both October and September. This would cause volumes to be up 3.4% compared to November 2008, when they were particularly weak. Survey evidence for November from the Confederation of British Industry (CBI) was pretty healthy, but the British Retail Consortium's sales monitor was slightly disappointing.

The CBI's distributive trades' survey for December (also out on Wednesday) is forecast to show that the balance of retailers reporting that sales were up year-on-year rose to +18% in November from +13% in October. This would be the highest level in more than two years and well above the average level of -14% for the first 11 months of 2009. It would also be exactly in line with the balance's long-term average of +18%, although again it needs to be borne in mind that the comparison is against a very weak performance a year earlier.

Very low mortgage interest payments and moderate inflation are boosting the purchasing power of a good many people, thereby giving them scope to step up their discretionary spending. It may also be the case that a significant number of people are determined to have a really good Christmas after enduring a very difficult year, even if it involves spending more. Furthermore, consumers may look to make purchases in the final weeks of this year (especially of big ticket items) ahead of VAT rising back up from 15.0% to 17.5% in January.

Nevertheless, the concern remains that if there is any significant pickup in spending over the final weeks of the year, it could prove temporary, and that the upside for consumption will be limited for some time to come due to still serious headwinds facing consumers. In addition to January's VAT hike, these notably include high and still-rising unemployment (albeit at a recently reduced rate), low and still-slowing earnings growth, and heightened debt levels. There is also a widespread need/desire for consumers to improve their personal finances. On top of this, credit conditions facing consumers are still tight.

The November housing market survey from the Royal Institute of Chartered Surveyors (out overnight Monday/Tuesday) is expected to show that housing market activity is still rising, but at a reduced rate, as was the case in the October survey. Of particular interest, given that a shortage of properties has been supporting house prices in recent months, will be whether or not the number of properties coming onto the market is rising due to vendors being attracted by recent firming prices. The October survey showed that the net balance of surveyors reporting an increase in new instructions to sell properties rose to +15%, from +5% in September. The balance of surveyors reporting that house prices increased over the previous three months is expected to have climbed to +38% in November, after rising to +34% in October from +21% in September.

While housing market activity has been lifted to a limited extent by the significant fall in house prices from their 2007 peak levels and low mortgage interest rates, the upside continues to be limited by unfavourable economic fundamentals (notably high and still-rising unemployment, low and still-moderating earnings growth) and ongoing relatively tight credit conditions. In addition, house price/earnings ratios are currently moving back up due to the firming in house prices from their early-2009 lows. Furthermore, the threshold for having to pay stamp duty of 1% will move back down to properties costing £125,000, from £175,000 at the end of this year.

We suspect that still-relatively-low housing market activity and still–largely-unfavourable economic fundamentals mean that the firming in housing prices seen since March/April will fizzle out before long and house prices will suffer a relapse in 2010. This is even more likely to occur if more properties come on to the market as a result of the recent firming in prices, given that a shortage of properties has been a key factor supporting house prices in recent months

The public finances for November (also out on Friday) will undoubtedly once again make their now usual dire reading. Tax revenues continue to be hammered by extended very weak economic activity, weakened corporate profitability, elevated and still-rising unemployment, markedly reduced bonus payments, last December's VAT cut, and still-relatively-muted housing market activity. Meanwhile, government expenditure and investment is being pushed up by high unemployment and the various stimulus measures that have been enacted this year to boost economic activity. Consequently, we expect the Public Sector Net Borrowing Requirement (PSNBR) to have jumped to £23.0 billion in November, from £15.4 billion in November 2008.

It is expected to be confirmed on Friday that business investment contracted 3.0% quarter-on-quarter and 21.7% year on-year in the third quarter. This would be a fifth successive quarter-on-quarter decline, but at least much reduced on the drops of 10.2% quarter-on-quarter in the second quarter and 8.9% quarter-on-quarter in the first quarter.

The worst of the contraction in business investment is almost certainly now over, but it is likely to remain limited for some time to come. Businesses are still facing relatively weak demand, high and still-rising levels of spare capacity, weakened profitability, and tight credit conditions. Furthermore, despite the economy's probable return to growth in the fourth quarter, businesses continue to have serious concerns and uncertainties about the strength and sustainability of any recovery. On top of this, still-significant concerns about the outlook for the commercial property sector and the housing market are limiting the upside for construction investment. Although low interest rates and improved equity and bond markets are helping many companies to raise finance, a lack of credit availability remains a serious problem for a significant number of companies. This is particularly true for smaller companies, and it continues to have a dampening impact on their business investment plans.

 

15 Dec - RICS House Price Balance, November: +38%
15 Dec - Consumer Price Inflation, November (Month-on-Month): +0.2%
15 Dec - Consumer Price Inflation, November (Year-on-Year): +1.8%
15 Dec - Core Consumer Price Inflation (ex Food, Drink, Tobacco), November (Year-on-Year): +1.9%
15 Dec - Retail Price Inflation, November (Month-on-Month): +0.3%
15 Dec - Retail Price Inflation, November (Year-on-Year): +0.3%
15 Dec - Underlying Retail Price Inflation, November (Month-on- Month): +0.3%
15 Dec - Underlying Retail Price Inflation, November (Year-on-Year): +2.6%
16 Dec - Claimant Count Unemployment Rate, November (%): 5.1%
16 Dec - Claimant Count Unemployment Change, November (000s): +15
16 Dec - International Labour Organization Unemployment Rate, October (%): 7.9%
16 Dec - Average Earnings including bonus, November (3-Month/Year): +1.3%
16 Dec - Average Earnings excluding bonus, November (3-Month/Year): +1.8%
17 Dec - Retail Sales, November (month-on-month): +0.4%
17 Dec - Retail Sales, November (year-on-year): +3.4%
17 Dec - CBI Distributive Trades Reported Volume of Sales, December: +18%
18 Dec - Public Sector Net Borrowing Requirement, November (GBP/Bln): 23.0
18 Dec - Business Investment, Third Quarter 2009 (Quarter-on-Quarter): -3.0%
18 Dec - Business Investment, Third Quarter 2009 (Year-on-Year): -21.7%

Global Insight (Reino Unido)

 


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