The British Retail Consortium (BRC) retail sales monitor for June (out overnight Monday/Tuesday) is expected to be very weak, thereby providing further evidence that seriously pressurized and worried consumers have put their hands straight back and deeply into their pockets. They had been encouraged to temporarily loosen their purse strings in April by the royal wedding, later Easter, and very good weather. Survey evidence from the Confederation of British Industry (CBI) has already pointed to soft retail sales in June while latest hard data show retail sales volumes fell 1.4% month-on-month (m/m) in May, which more than outweighed the 1.1% spike in April.
The consensus forecast is for the June BRC survey to show that total sales fell 1.4% year-on-year (y/y) in June. The May BRC survey showed that total retail sales fell 0.3% y/y in May after a rise of 6.9% y/y in April and a drop of 1.9% y/y in March. Meanwhile, sales fell 2.1% y/y in May on a like-for-like basis (which strips out the effect of additional floor space). This followed a jump of 5.2% y/y in April and a drop of 3.5% y/y in March. The sales patterns in April and March were distorted significantly by the much later Easter in 2011 compared with 2010. The BRC revealed that "big-ticket items suffered most" in May, which highlights the reluctance or increased inability of many consumers to make major purchases.
Consumer spending is likely to be muted for some time to come as household purchasing power remains under severe pressure from high inflation, low wage growth, and tighter fiscal policy. The squeeze on purchasing power is highlighted by latest data showing that household disposable income fell 0.8% quarter-on-quarter (q/q) and 2.7% y/y in the first quarter of 2011 and that the savings ratio fell to 4.6% from 5.1% in the fourth quarter of 2010 and 5.6% in the third quarter
Furthermore, soaring utility bills will shortly add to the squeeze on consumers (with British Gas becoming the second utility company to announce sharp gas and electricity price hikes from August). In addition, unemployment is still high and debt levels are elevated. Meanwhile, the weak housing market has adverse repercussions for consumer spending (a healthy housing market activity boosts demand for carpets, fittings, and furnishings as well as major household appliances while rising house prices can have a significant wealth effect).
On top of this, many consumers are likely worried about future Bank of England interest-rate hikes, although these look increasingly unlikely to occur before 2012. Even small interest-rate rises could present serious problems for financially stretched households. Furthermore, 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. In fact, weak consumer spending is likely to be a key factor deterring the Bank of England from raising interest rates for many months to come.
RICS Housing Market Survey for June
The housing market survey by the Royal Institution of Chartered Surveyors (RICS) for June (overnight Monday/Tuesday) will as usual provide key information on the supply/demand metrics of the housing market, as well as latest price developments.
The May RICS survey was pretty soft across the board. While housing market activity has remained generally muted so far in 2011, the RICS suggested that May’s disappointing developments may have been influenced by the lingering impact of the “unusual succession of public holidays at the end of April/beginning of May.”
If this was the case and if the housing market is going to see any significant improvement in the near term, there should have been a noticeable pickup in buyer enquiries and newly agreed sales in June. The number of houses coming onto the market in June will also be of key interest, as this has been at a decent level recently, which dilutes the possibility that a shortage of properties could provide significant support to house prices.
The RICS survey may reveal that the balance of surveyors reporting that house prices increased over the previous three monthsrallied modestly to -23% in June after relapsing to a four-month low of -28% in May from -21% in April. This balance stood at -31% in January and an 18-month low of -49% in October 2010.
We believe that house prices are likely to fall by around 5% from current levels by mid-2012. We anticipate that house prices will retreat modestly as squeezed purchasing power, tightening fiscal policy, a soft labor market, and worries over the economic outlook weigh on potential buyers. These headwinds are seen outweighing the support to the housing market coming from likely persistent low interest rates.
We have recently reduced our projected drop in house prices by mid-2012 from 8% to 5%, primarily because we now expect interest rates to start rising later and more slowly than we had anticipated. Specifically, we now expect the Bank of England to hold off from raising interest rates until the second quarter of next year and to only increase them to 1.50% by end-2012.
Inflation in June
Data out Tuesday are expected to show annual consumer price inflation was stable at 4.5% in June after originally spiking to this level in April from 4.0% in March. This would keep inflation at its highest level since October 2008 and more than double the Bank of England's target level. Meanwhile, core consumer price inflation is seen easing to 3.2% in June after retreating to 3.3% in May from 3.7% in April.
We suspect that inflation was stable in June as higher food prices countered a drop in fuel prices and some retailers started their summer sales earlier to try to get hard-pressed consumers to part with their cash.
Although consumer price inflation may well have stood at 4.5% for a third month running in June, it remains likely that it will reach 5.0% later this year. Inflation is likely to be driven up by higher utility charges kicking in from August. Both British Gas and Scottish Power have announced hefty increases in their charges for gas and electricity from August, and other utility providers seem certain to announce similar hefty increases.
Consumer price inflation will hopefully gradually start trending down in late 2011 as the upward impact from value-added tax (VAT) developments; high energy, commodity, and food prices; and sterling's past sharp depreciation wanes. In addition, below-trend economic activity and ongoing muted wage growth are expected to limit underlying inflationary pressures. Inflation should dip markedly at the start of 2012 as the impact of the January 2011 VAT hike drops out. We believe consumer price inflation could realistically settle to 2.0% again by late 2012/early 2013. Much will obviously depend on oil price developments.
Trade Deficit in May
The total trade deficit (Tuesday) is expected to have narrowed marginally to GBP2.7 billion in May from GBP2.8 billion in April. This would be markedly below the average monthly deficit of GBP4.1 billion seen in 2010. Within this, the traded goods deficit is forecasted to have been essentially stable at GBP7.4 billion in May, which would be well below the average GBP8.2-billion monthly deficit in 2010.
The net trade performance was the one bright spot of the UK economy in the first quarter, when it added an exceptional 1.4 parentage point to overall GDP growth of just 0.5%. This raised hopes that exports were finally benefiting markedly from decent global growth and a competitive pound, thereby helping the economy to achieve much-needed rebalancing.
Nevertheless, while latest data still point to a markedly improved net trade performance compared with 2010, they nevertheless indicate that net trade will make nothing like the contribution to GDP growth in the second quarter that it did in the first. In fact, there are currently signs that exports may be starting to falter after the bright start to 2011. The latest hard data show export volumes of traded goods fell 2.4% m/m in April itself. Furthermore, there are signs in recent surveys by the manufacturing purchasing managers and the CBI that foreign demand for UK manufactured goods is softening in line with a loss of momentum in global growth. UK exports are also at risk from any sustained problems in key Eurozone markets resulting from recurrent sovereign debt problems.
At the same time, we suspect moderate UK domestic demand will limit UK import volumes. Import volumes of traded goods fell 1.6% m/m in April, which was a fourth successive decline. Imports of consumer goods and cars were particularly soft in April.
Unemployment in June
Labor market data on Wednesday are likely to be mixed. Claimant-count unemployment is forecasted to rise a further 15,000 in June after increases of 19,600 in May and 16,900 in April. This would be a fourth successive increase and take the number of claimant-count unemployed to a 14-month high of 1.5077 million in June, from a 24-month low of 1.4498 million in February. Claimant-count unemployment is currently being pushed up by recent changes made to the benefits system, although this did not account for all of the increase in May. The claimant-count unemployment rate is expected to have climbed to 4.7% in June from 4.6% in May and April, and 4.5% in the five months through to March.
Nevertheless, the number of jobless on the International Labour Organization (ILO) measure is seen falling by 58,000 in the three months to May to stand at 2.420 million, although this would be significantly less than the drop of 88,000 in the three months April. It appears that the recent sharp drop in ILO unemployment may have been significantly influenced by students reassigning themselves as “inactive.” The ILO unemployment rate is seen stable at 7.7%. ILO data are also likely to show that employment rose around 20,000 in the three months to May to 29.26 million. This would be markedly down on the increase of 80,000 in the three weeks to April.
The labor market is currently showing resilience in the face of a struggling economy, but the key question is can it last? We have serious doubts about this and suspect that unemployment will head up in the second half of the year and the early months of 2012 as public-sector jobs are increasingly pared and private-sector companies become more cautious in the face of persistently sluggish growth. We think unemployment on the ILO measure could very well reach a peak of 2.6 million in 2012, taking the unemployment rate up to 8.3%.
Average Earnings in May
Underlying average earnings growth (Wednesday) is expected to have remained very low compared with past norms. This is the consequence of relatively high unemployment, workers' job insecurity, and the ongoing need for companies to limit their costs in a challenging environment. Specifically, underlying average weekly earnings growth (regular pay excluding bonus payments) is seen stable at 2.0% in the three months to May. Annual average weekly earnings (total pay) growth is expected to have been a similar 2.1% in the three months to May. These rates are well below the 4.5% level that is generally considered consistent with the Bank of England's 2.0% consumer price inflation target. They are also well below current inflation levels.
There is still little evidence that current elevated inflation and households’ increased inflation expectations are feeding through to markedly lift wage growth. While there are signs in some of the latest surveys that pay might be picking up modestly in the private sector, it remains very low compared with long-time norms and it is being countered by pay being frozen for many public-sector workers. In fact, the June survey from the Recruitment and Employment Confederation (REC) and accounting firm KPMG indicated that growth in both permanent and temporary staff salaries slowed further and was “only marginal.”
We expect wage growth to increase only modestly over the coming months and to remain limited compared with long-term norms,due to workers' weak bargaining position given high and likely-to-rise unemployment. Households' purchasing power will continue to be squeezed markedly.
