The British Retail Consortium (BRC) retail sales monitor for September (out overnight Monday/Tuesday) is expected to show modestly improved retail sales compared with August. The Confederation of British Industry (CBI) has already released its distributive trades survey for September, which somewhat surprisingly showed that the balance of retailers reporting that sales were up year-on-year spiked to a more-than-six-year high of +49%, from +35% in August.

The August BRC monitor showed total retail sales rising 2.8% year-on-year (y/y) while sales rose 1.0% on a like-for-like basis (which strips out the effect of additional floor space). Hard data from the Office for National Statistics showed that retail sales volumes fell 0.5% month-on-month (m/m) in August and were up just 0.4% y/y.

If the BRC September survey is healthy, it would lift hopes that consumer spending was pretty resilient in the third quarter and contributed significantly to GDP growth. While GDP growth clearly slowed substantially in the third quarter after the economy expanded a heady 1.2% quarter-on-quarter (q/q) in the second quarter, resilient consumer spending would limit the downside.

Conversely, a weak BRC survey would further stoke fears that growth is slowing rapidly and the economy could even be heading for a "double dip."

It is likely that retail sales will benefit to a limited extent in the final months of the year from consumers looking to make purchases of more expensive items ahead of the January value-added tax (VAT) increase from 17.5% to 20.0%.

Nevertheless, the suspicion is that further out consumers are likely to find life hard and will be constrained in their spending. The sharp fall in the savings ratio in the second quarter highlights that many consumers are having to dip into their savings to finance any marked pickup in spending. Going forward, the substantial fiscal squeeze will increasingly hit public-sector jobs and consumers' pockets, while households already face high unemployment, muted earnings growth, and elevated debt levels. In the near term at least, rising food prices threaten to weigh down on the purchasing power of poorer consumers in particular.

RICS Housing Market Survey for September

The September housing market survey from the Royal Institute of Chartered Surveyors(RICS; overnight Monday/Tuesday) is likely to show that the supply/demand balance in the housing market currently remains in favor of buyers, thereby dampening prices. The August RICS survey showed the balance of surveyors reporting new instructions to sell moderated to +12% from +33% in July, which had been the highest balance since May 2007. New buyer interest fell in August for a third successive month and at the fastest rate since January (when it was hit by the very bad weather). Meanwhile, we expect the RICS survey to reveal the balance of surveyors reporting that house prices increased over the previous three months to have weakened further to -35% in September after plunging to -32% in August, from -8% in July and +8% in June.

Further evidence of softening house prices is expected to come on Tuesday when theDepartment for Communities and Local Government (DCLG) releases data for August. It needs to be borne in mind that the DCLG provides lagging evidence on house prices as the office calculates its index at the time when mortgages are completed. The July data from the DCLG showed that house prices fell 0.3% m/m, thereby causing the y/y increase to moderate to 8.4% from 9.9% in June and a peak of 10.6% in May.

We expect house prices to trend down relatively gradually over the final months of 2010 and in 2011 to lose around 10% in value. There is likely to be significant volatility around this gradual overall downward trend.

High unemployment, muted wage growth, an increasing fiscal squeeze, low consumer confidence, difficulties in getting a mortgage, a housing supply/demand balance currently firmly in favor of buyers, and a house price/earnings ratio above long-term norms are a poor combination of factors for house prices. Low interest rates and the current stamp-duty holiday for first-time buyers on all properties costing up to £250,000 only partially offset these adverse factors.

Inflation in September

Data out Tuesday are expected to show annual consumer price inflation was stable at 3.1% in September, having originally moderated to this level in July from 3.2% in June and a 17-month high of 3.7% in April. This would keep inflation appreciably above the Bank of England's target rate of 2.0%. We expect higher food prices to have stopped inflation heading lower in September, and it is also notable that inflation dipped appreciably in September 2009 so base effects are pretty unhelpful. In fact, consumer price inflation bottomed out at 1.1% in September 2009. Core consumer price inflation is seen edging down to 2.7% in September from 2.8% in August.

Meanwhile, annual underlying retail price inflation is expected to have slowed to 4.4% in September from 4.7% in August and a peak of 5.4% in April, while the y/y increase inheadline retail prices is also forecasted to have narrowed to 4.4% in September from 4.7% in August and a peak of 5.3% in April.

We expect consumer price inflation to edge down modestly over the final months of 2010, although much will depend on what happens with food prices. The upward pressure from unfavorable oil price base effects and sterling's past depreciation is expected to wane. Meanwhile, underlying price pressures should be contained by appreciable excess capacity, likely slowing growth, ongoing wage moderation amid high unemployment and job insecurity, and the need for retailers to price competitively in the face of fragile consumer spending.

Nevertheless, downward progress on inflation will be limited by VAT rising to 20.0% from 17.5% in January 2011 (although this may not actually push inflation up, given that there was also a VAT hike in January 2010, back to 17.5% from 15.0%). Consequently, consumer price inflation is unlikely to fall below the Bank of England's 2.0% target level until 2012 when the January 2011 VAT hike will fall out of the calculation.

Trade Deficit in August

The total trade deficit (Thursday) is expected to have narrowed to £4.1 billion in August, after jumping to a near-five-year high of £4.9 billion in July, from £3.9 billion in June. Even so, this would still be above the average monthly shortfall of £3.8 billion during the first seven months of 2010. Within this, the visible trade deficit is forecasted to have fallen to £7.8 billion in August, after spiking to £8.7 billion in July from £7.5 billion in June.

The trade data for July were particularly poor, thereby adding to mounting concerns over third-quarter growth prospects. With latest data suggesting that domestic demand could be losing significant momentum, the United Kingdom can certainly do without net trade deteriorating anew after almost balancing in the second quarter. The best thing that could be said about the July trade data are that an appreciable increase in imports pointed to still-decent domestic demand.

The U.K. export performance so far in 2010 has been lackluster and largely disappointing, given the past sharp depreciation of the pound and improved global growth and trade. A pickup in U.K. exports in May (up 1.1% m/m) and, especially June (up 2.1% m/m) had suggested that exports could finally be starting to increasingly benefit from sterling's weakness and improved global growth and trade, but July's slip in exports diluted these hopes. There is a serious risk that U.K. exports will be hit over the coming months by slower global growth. Worryingly the latest manufacturing purchasing managers' survey indicated that export orders contracted in September for the first time since July 2009. The export orders balance was also weaker in the September industrial trends survey from the Confederation of British Industry.

Unemployment in September

Data on Wednesday are forecasted to show that claimant-count unemployment rose a further 3,000 in September, after edging up 2,300 to 1.466 million in August from a 16-month low of 1.464 million in July. August had seen the first increase in claimant-count unemployment since January, although the rate of decline in the number of claimant-count unemployed had previously slowed appreciably. There had been a drop of just 1,000 in July, compared with declines around 30,000 in May and April. The claimant-count unemployment rate is expected to remain at 4.5% in September, having originally fallen to this level in July from 4.6% in June and a 12-year high of 5.0% seen in the five months through to January 2010.

Meanwhile, the number of jobless on the International Labour Organization (ILO) measure is seen edging up 2,000 in the three months to August to stand at 2.469 million, thereby maintaining the ILO unemployment rate of 7.8%. ILO data are also likely to show that employment continued to rise in the three months to August, but at a reduced rate. Furthermore, the rise in employment is expected again to be mainly due to an increase in the number of part-time workers.

We suspect that unemployment is headed up over the coming months as a consequence of slower, below-trend growth, rising business caution, and public-sector jobs being increasingly pared.

Major job losses are on the way in the public sector as the government slashes spending, and we doubt that the private sector will be able to fully compensate for this. We suspect that firms will become increasingly cautious in their employment plans, reflecting slowing growth and their concerns that the intensified fiscal squeeze will hold back expansion over the long term—recent surveys suggest that this is indeed the case. In particular, many firms are likely to try 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 unless they are really convinced that sustained improvement in their business is probable. In fact, we expect GDP growth to moderate appreciably in the second half of this year after the sharp improvement in the second quarter and to be relatively muted in 2011.

Specifically, we see unemployment on the ILO measure peaking around 2.85 million in the first half of 2012, with the unemployment rate reaching 9.0%.

Meanwhile, earnings growth is expected to have risen modestly in August but to have remained very low compared with past norms, 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 1.9% in the three months to August. Meanwhile, annual average weekly earnings (total pay) growth is expected to have risen 1.7% in the three months to August.