The May housing market survey from the Royal Institute of Chartered Surveyors (out overnight Monday/Tuesday) will be scanned for indications that housing market activity may be starting to pick up appreciably after a muted start to 2010. Bank of England mortgage data for April were still soft, but the April RICS survey pointed to some pick-up in buyer interest and agreed housing sales. It will also be very interesting to see how many properties came on to the market in May. This is particularly significant as a shortage of properties has been a major factor in the significant overall recovery in house prices from their early-2009 lows. The April RICS survey revealed that the balance of surveyors reporting new instructions to sell properties remained clearly positive, but nevertheless retreated to +11% from a 34-month high of +21% in March. Meanwhile, we expect the RICS survey to reveal that the balance of surveyors reporting that house prices increased over the previous three months eased back to +15% in May after rallying to +17% in April from an eight-month low of +9% in March. This would still be down appreciably from a high of +35% in November 2009.

We continue to believe that house prices will struggle to make significant gains over the coming months. Although it may have picked up modestly from its early-2010 lows, housing market activity is limited, the economic fundamentals (high unemployment, still falling employment, low earnings growth, and looming tighter fiscal policy) are far from robust for the housing market and credit conditions remain tight. There are also growing concerns that the Bank of England will have to raise interest rates before the end of the year due to higher-than-expected inflation. Meanwhile, more properties are coming on to the market, thereby moving the supply/demand balance more in favour of buyers. Some support for house activity and prices will come from the current stamp duty holiday for first-time buyers on all properties costing up to £250,000.

Inflation in May

Data out on Tuesday are expected to show annual consumer price inflation moderated to 3.4% in May, after reaching a 17-month high of 3.7% in April. While this would still be substantially above the Bank of England's target rate of 2.0%, it would at least provide support to the central bank's belief that inflation will head down significantly over the coming months and help it justify keeping interest rates down at 0.50%.

Consumer price inflation is likely to have been limited in May by oil prices falling back appreciably. In addition, the May shop price deflator from the British Retail Consortium indicated that shops had engaged in increased discounting and promotional activity to try to encourage reluctant consumers to spend. Core consumer price inflation is seen easing back to 2.9% in May from 3.1% in April. Meanwhile, annual underlying retail price inflationis expected to have moderated to 5.0% in May from 5.4% in April, while the year-on-year increase in headline retail prices is forecast to have narrowed to 5.0% in May from 5.3% in April.

Consumer price inflation should head down over the coming months. Given that oil prices bottomed out in the first quarter of 2010 and then firmed, oil-price-related base effects should become more favourable barring a renewed sharp rise in oil prices over the coming months. Indeed, oil prices have softened significantly recently. Meanwhile, underlying price pressures should be contained by substantial excess capacity, likely bumpy and gradual recovery, wage moderation amid high unemployment and job insecurity, and a need for retailers to price competitively in the face of still fragile consumer spending. Furthermore, as sterling troughed in late-2008/early-2009, the pound's sharp depreciation should now have largely finished feeding through to push up prices. The inflation profile will be higher for a while if value-added tax *(VAT) is raised to from 17.5% to 20%—either at the 22 June emergency budget or sometime within the next year—as seems likely as part of the major fiscal consolidation measures that are on the way.

Unemployment in April

Data on Wednesday is likely to show that claimant count unemployment fell by some 20,000 in May. This would be down from drops of 27,100 in April and 32,700 in March. Theclaimant count unemployment rate is anticipated to be stable at 4.7% in May, after dipping to this level in April from 4.8% in March and the 12-year high of 5.0% seen in the five months through to January. The number of jobless on the International Labour Organization (ILO) measure is seen rising by around 60,000 in the three months to April to stand at 2.510 million, thereby keeping the ILO unemployment rate at 8.0%.

The data are also likely to show that employment is continuing to fall as well as unemployment. Indeed, latest data show that employment fell by 76,000 in the three months to March. This indicates that the number of unemployed has been limited by people withdrawing from the labour market for the time being. It also indicates that the claimant count unemployed figure is being reduced by people either being unable to claim benefits or choosing not to. It is also evident that the labour market has been helped by both employers and employees being flexible in trying to prevent permanent job losses, including the use of such measures as wage freezes or pay cuts, working part time, extended unpaid leave and career breaks. The economy's return to modest growth since the fourth quarter of 2009 is also obviously helping matters.

We continue to believe it is premature to call the all-clear on the jobs front, despite recently improved economic activity and the overall resilience of the labour market through the economy's travails. In particular, substantial job losses are likely in the public sector going forward as the government increasingly squeezes public spending.

Furthermore, there could very well yet be further job losses in the private sector despite recent increased signs of stabilization. In the near term at least, many firms are likely to meet any increase in business through making greater use of the workers they have already, and they are likely to be reluctant to take on any more staff until they are really convinced that sustained improvement in business is probable. There may well be increasing concern that the recovery could be derailed by the looming substantial fiscal tightening. Furthermore, there remains the risk that if recovery proves to be bumpy and gradual, some firms may well decide that they really cannot hold on to some of their workers any longer.

Meanwhile, underlying earnings growth is expected to have risen modestly but to still be low, reflecting relatively high unemployment, workers' job insecurity and the ongoing need for companies to limit their costs in a still challenging environment. Annual underlying average weekly earnings growth (regular pay - excluding bonus payments) is seen limited to 2.0% in the three months to April. However, average weekly earnings (total pay)are forecast to have risen by 4.5% year-on-year in the three months to April as they were lifted temporarily by higher bonuses compared to a year ago.

CBI Industrial Trends Survey for June

The Confederation of British Industry (CBI) industrial trends survey for June is out on Thursday, and it is expected to show that the balance of manufacturers reporting that their orders are at normal levels rose further to -17% in June after jumping to a 21-month high of -18% in May from -36% in April. Despite latest data from the Office for National Statistics showing that manufacturing output eased back by 0.4% month-on-month in April, this dip followed very strong increases in production in both March and February, and most latest indicators point to an ongoing decent manufacturing rebound from the deep overall contraction in activity in 2008/9.

Manufacturers are currently benefiting from healthier demand both at home and, particularly, overseas, improved competitiveness in both domestic and foreign markets stemming from the weak pound, and leaner stock levels. The key question is though can manufacturers sustain healthy growth over the medium term, particularly as fiscal policy is tightened substantially. Furthermore, U.K. manufacturers will be desperately hoping that the Eurozone debt crisis does not derail growth in the region, as there had been signs that Eurozone growth has picked up after faltering around the turn of the year.

Retail Sales in May

Retail sales volumes (out on Thursday) are forecast to have risen by a relatively modest 0.3% month-on-month in May, thereby matching April's growth rate. This would give year-on-year growth of 2.3% in May. Survey evidence for May from the Confederation of British Industry was weak, but it was modestly better from the British Retail Consortium indicating that sales may have picked up during the month.

In the near term, retailers will be looking for a good performance by England in the World Cup as this would provide a boost to sales. The football World Cup always tends to have some upward impact on retail sales and this is liable to be magnified the better that England does. Specifically, the World Cup tends to lift demand for a number of products including widescreen flat TVs, a wide range of World-Cup related merchandise such as replica shirts, magazines and flags, snacking food, and alcohol and other drinks. It also usually encourages sales of take-away and home-delivery food. If England does well, there could well be a boost to consumer confidence in the near term.

Further out, it is hard to be optimistic about the prospects for consumer spending. Indeed, we believe that consumer spending will be limited for some time to come, which does not bode well for overall growth prospects given that consumer spending accounts for some 65% of GDP. Specifically, consumers face high unemployment and still-falling employment, low underlying earnings growth, elevated debt levels, high fuel prices, and January's VAT hike from 15.0% back up to 17.5%.

In addition, more tax increases are on the way as the coalition government moves to rein in the public finances. This could very well include VAT being raised to 20% (possibly as soon as in the June 22 emergency budget). Meanwhile, still significant uncertainties about the economic outlook and jobs are likely to maintain many consumers' desire to improve their personal finances. There is also some pressure on the Bank of England to raise interest rates before the end of the year due to heightened inflation concerns, although we believe that they will hold fire for many more months to come given still relatively gradual recovery as well as the serious uncertainties over the outlook stemming from the Eurozone crisis and the looming major fiscal squeeze.

Public Finances in April

The public finances data for May (out on Friday) will hopefully mark a continuation of the now pretty consistent recent trend showing that the rate of deterioration is moderating compared to a year ago. Tax receipts are benefiting from the economy's return to growth since the fourth quarter of 2009 and VAT rising back up from 15.0% to 17.5% in January. In addition, unemployment benefit claims have fallen by 110,900 from last October's 12-year high of 1.6278 million. Consequently, we expect the Public Sector Net Borrowing Requirement (PSNBR) to come in at £18.0 billion in May compared to £17.6 billion in May 2009.

Even so, this would still be a horrible-looking figure and would not dilute the massive task that the coalition government faces in returning the public finances to a sustainable state over the next five years (if the coalition really does last that long!). The emergency budget on 22 June and the comprehensive spending review this autumn is not going to be pleasant for anyone as further major spending cuts and tax hikes are inevitable.

Prime Minister David Cameron's recent speech was very much part of an orchestrated process by the government to prepare the public to take the nasty medicine that the U.K. economy has to take for a long time to get back to long-term fiscal health. In addition to trying to get the public on its side, the government is also obviously hoping that its tough talk will impress the markets and help keep gilt yields down. The government has to tread a fine line through a very difficult path as there is a significant risk that the tough talk could have a major dampening impact on consumer and business confidence and behaviour even before most of eventual measures start to kick in, thereby weakening an already fragile recovery.