The British Retail Consortium (BRC) retail sales monitor for April (out overnight Monday/Tuesday) is expected to show ongoing muted sales, although there is likely to be some improvement compared with March. This is seen due to sales in April being lifted by the later Easter this year, better weather, and, possibly, a modest boost from the royal wedding (which may have lifted demand for souvenir products, food, and drink for street parties). The already-released Confederation of British Industry (CBI)'s distributive trades' survey showed a limited pickup in sales in April, although the underlying picture remained soft. The March BRC retail sales monitor showed thattotal sales fell 1.9% year-on-year (y/y) in March, which was the sharpest decline since the BRC started collecting data in 1995. Meanwhile, sales plunged by 3.5% y/y in March on a like-for-like basis (which strips out the effect of additional floor space). This was the weakest performance since April 2005. Nevertheless, the March y/y comparison was hit significantly by the fact that sales had been boosted in 2010 by Easter falling in March, although this did not explain all the weakness.

The underlying impression is that consumers have become significantly less willing, and able, to spend in the face of serious headwinds. Given that consumer spending accounts for some 65% of GDP, this is worrying for growth prospects.

Consumers' purchasing power is currently being squeezed hard by high inflation in tandem with ongoing muted wage growth.Concerns over jobs, the economy, and fiscal tightening increasingly kicking in from April (for example, employees' national insurance contributions have risen) are also clearly weighing on consumer confidence and willingness to spend. In addition, the weak housing market has adverse repercussions for consumer spending. Furthermore, many consumers are likely worried that the Bank of England could start to raise interest rates before long. Even if the Bank of England only edges interest rates up, it will affect consumer psychology as people are bound to see the move as the first in a series of hikes. Reflecting these concerns, the GfK NOP consumer confidence index fell appreciably to a 26-month low in April, with consumers less willing to make major purchases.

RICS Housing Market Survey for April and Halifax House Price Index

The April housing market survey from the Royal Institute of Chartered Surveyors (overnight Monday/Tuesday) will offer important evidence as to whether or not housing market activity is showing any signs of picking up significantly and on how many properties are coming on to the market.

The supply-demand metrics in the housing market will be a key determinant in how house prices move over the coming months. The March RICS survey indicated that buyer enquiries fell for the 10th month running and at a modestly increased rate (the balance fell to -6% after narrowing to -1% in February from -18% in November). Furthermore, the RICS revealed that the average number of sales per surveyor at 14.4 over the past three months was the lowest level since June 2009. Meanwhile, the number of houses coming on to the market rose modestly in March as the RICS balance measuring vendor instructions stood at +4%. This was down from +5% in February, but marked a second month of increased properties for sale after four months of fewer houses coming on to the market.

Meanwhile, we expect the RICS survey to reveal that the balance of surveyors reporting that house prices increased over the previous three months to have been stable at -20% in April. It climbed to this still very weak level in March from -21% in February, -31% in January, and an 18-month low of -49% in October 2010.

The Halifax lender is also expected to report during the week that house prices were flat month-on-month (m/m) in April. The Halifax house price index has been particularly volatile in recent months, showing a rise of 0.1% in March, a drop of 0.9% in February, a rise of 0.8% in January, and a drop of 1.1% in December. Flat house prices in April would cause prices to be down by 3.0% year-on-year (y/y) in the three months to April (the Halifax prefers to highlight the three-month y/y house price rate to smooth erratic movements).

We expect house prices to trend down gradually through the rest of 2011 and, very possibly, the early months of 2012 as tighter fiscal policy and the possibility of gradually rising interest rates before the end of 2011 pressurize the housing market. On top of that, high unemployment, negative real income growth, elevated debt levels, and still-significant difficulties in getting a mortgage (particularly for first-time buyers) do not bode well for house prices. Furthermore, very low and currently falling consumer confidence will make many people reluctant to risk buying a house. Meanwhile, although there are signs that housing market activity has edged off its lows recently, it is still at a very weak level that historically has been associated with falling house prices.

Some support to house prices could come if the number of houses coming on to the market is limited over the coming months. The modest support provided to first-time buyers in the budget is too small to provide major support to the housing market.

On balance, we believe that house prices are likely to fall around 7% overall from current levels by mid-2012 and end up declining some 10% overall from their peak levels in 2010.

Trade Deficit in March

The total trade deficit (Wednesday) is expected to have widened to GBP3.4 billion in March, after narrowing sharply to a 12-month low of GBP2.4 billion in February from GBP3.9 billion in January and a five-year high of GBP5.7 billion in December 2010 (when it was pushed up by the severe weather seemingly affecting exports more than imports). Within, this, the traded goods deficit is forecasted to have widened to GBP7.5 billion in March, after narrowing to GBP6.8 billion in February from GBP7.8 billion in January and GBP9.7 million in December.

Nevertheless, this would still mean that the trade deficit narrowed sharply in the first quarter of 2011 and would indicate that net trade made a significant positive contribution to overall disappointing GDP growth of 0.5% quarter-on-quarter (q/q) during the quarter. This would be a very welcome development as up until the end of 2010 hopes that decent global growth and a weak pound would enable exports of goods and services to grow more than imports and help the economy to become more balanced was repeatedly thwarted. In fact, net trade contributed 0.5 percentage point to the 0.5% q/q contraction in GDP in the fourth quarter of 2010 and it also was negative by 1.0 percentage point overall in 2010, which was a major factor limiting UK GDP growth to 1.3%.

On a positive note, latest survey evidence still looks decent for near-term export prospects. In particular, the export orders balances in both the April industrial trends survey by the CBI and, particularly, the April manufacturing purchasing managers' survey were still at elevated levels, although they have fallen from the long-term peak levels seen in February.

Nevertheless, there is a serious risk that global growth could be hit over the coming months by high oil prices, while UK exports are also at risk from any sustained problems in the key Eurozone market resulting from recurrent sovereign debt problems. It also needs to be borne in mind that high oil and commodity prices are pushing up the value of UK imports.

Bank of England Quarterly Inflation Report for May

Following the Monetary Policy Committee (MPC)'s decision to keep interest rates at 0.50% and the stock of quantitative easing unchanged at GBP200 billion at the conclusion of its 4–5 May meeting, attention will focus on the central bank's Quarterly Inflation Report for May(Wednesday). The bank's new GDP growth and consumer price inflation forecasts contained in the report (which the MPC had access to at its May meeting) will provide important insights into how monetary policy is likely to develop in both the near term and over a two-year horizon.

We expect that the Bank of England's new quarterly forecasts will show higher consumer price inflation forecasts in the near term, but then a similar profile further out to what was projected in the February report. Meanwhile, the Bank of England seems likely to lower its GDP growth forecasts for both 2011 and 2012. If this is the case, it would suggest that interest rates are more likely than not to start rising gradually in the latter months of 2011.

The MPC's decision to keep interest rates at 0.50% at its May meeting clearly reflected current serious concerns and uncertainties over the state of the economy and its ability to withstand the fiscal squeeze that increasingly kicked in from early April. A flurry of recent disappointing data and surveys has likely heightened the MPC's concerns over the economy, particularly the tepid GDP growth in the first quarter of 2011 following contraction in the fourth quarter of 2010.

At the same time, an easing in consumer price inflation to 4.0% in March from 4.4% in February and ongoing muted earnings growth eased pressure for an immediate interest-rate hike. Having said that, it is clearly far too early to say that the UK is coming out of the inflation woods. It is probable that inflation was limited in March by Easter occurring a month later this year. So it is still very possible that consumer price inflation will move higher in the near term. Crucially, ongoing muted pay fuels belief that a damaging wages-prices upward spiral will develop, and supports the view that consumer price inflation will fall markedly once the upward pressures from value-added tax (VAT) changes, higher oil and commodity prices, and sterling's past weakness wanes. The current sharp correction in oil and commodity prices is good news on this front.

We expect the Bank of England to delay raising interest rates from 0.50% to 0.75% until November, and it is far from inconceivable that it could hold fire until 2012. This reflects our belief that growth will be muted during much of 2011 and that a soft labor market will prevent higher inflation expectations feeding through to lift wage growth significantly. We also believe that most MPC members will remain cautious over lifting interest rates, given that the fiscal squeeze is really kicking in now.

Even if interest rates do rise in the near term, the probability remains that they will move up relatively gradually and stay very low compared with past norms. We see interest rates only rising to 2.00% by the end of 2012. Monetary policy will need to stay loose for an extended period to offset the impact of the major, sustained fiscal squeeze. In addition, we do believe that inflation will fall markedly later on in 2011 and 2012 as relatively modest, below-trend growth and elevated unemployment limits underlying inflationary pressures. In particular, ongoing substantial pressures on consumers are likely to limit both growth and inflation.

Manufacturing Output and Industrial Production in March

We expect manufacturing output (Thursday) to have expanded by a decent 0.5% m/m in March after surprisingly being only flat in February. This would cause manufacturing output to be up 3.0% y/y in February. Overall industrial production is expected to have risen by 0.8% m/m in March, after contracting 1.2% in February when it was pulled down by a sharp drop in mining and quarrying activity resulting from oil and gas extraction being held back by maintenance work.

While manufacturing output is expected to have been decent in March and has been generally robust over the past year or so, April survey evidence from both the CBI and the purchasing managers suggests that the manufacturing sector could be starting to come off the boil.Manufacturers have been benefiting from decent orders both at home and overseas, the competitive level of the pound, and an ongoing rebuilding of stocks after they had been slashed during the recession.

The latest surveys fuel concern that manufacturers will find life increasingly challenging over the coming months as stock rebuilding wanes and tighter fiscal policy weighs down on domestic demand. And while global economic activity currently looks decent, there is the risk that it could be hit by high oil prices. Furthermore, high oil prices and surging input costs are a serious problem for UK manufacturers by substantially squeezing their margins and putting pressure on them to raise prices and risk losing business. There is also the ongoing risk that sovereign debt problems in the Eurozone could escalate and dampen orders from key UK overseas markets. Meanwhile, problems in Japan could also hurt manufacturing activity by causing supply-chain disruptions. This is particularly a potential problem for the auto and consumer electronics sectors.