The current-account deficit (out Tuesday) is forecasted to come in around GBP7.3 billion in the second quarter of 2011, while the shortfall in the first quarter is likely to be revised down appreciably from the current reading of GBP9.4 billion. The Office for National Statistics has revised the way it calculates some data, which means that the surplus in services trade is now appreciably higher than was previously reported (by around GBP2.0 billion). Also reflecting other revisions, the UK’s total trade deficit in goods and services is now reported at GBP5.8 billion in the first quarter, compared with the GBP8.5-shortfall last shown in the current-account data.
Nevertheless, the total trade deficit widened to GBP6.8 billion in the second quarter from GBP5.8 billion in the first. Exports edged up just 0.2% quarter-on-quarter (q/q) to GBP119.9 billion while imports increased 1.0% to GBP126.7 billion. In addition, the net income surplus could have narrowed modestly further in the second quarter after falling to GBP4.6 billion in the first quarter of 2011 from GBP7.4 billion in the fourth quarter of 2010. Meanwhile, the UK's shortfall in current net transfers is likely to have been around GBP5.0 billion in the second quarter.
CBI Industrial Trends Survey for October
We expect the Confederation of British Industry (CBI) industrial trends survey for October (Wednesday) to show manufacturing activity remains substantially below the levels seen during 2010 and early 2011. Specifically, we forecast the balance of manufacturers reporting that orders are at normal levels remained at -9% in October after falling sharply to this level in September from +1% in August. This is expected to be the consequence of an overall softening in recent months in both domestic and foreign demand. Even so, this would still be above the long-term average for the balance of -18%.
We also expect the October CBI survey to reveal that manufacturers are less optimistic about their near-term production prospectsand that fewer of them are expecting to raise their domestic prices over the next three months in the face of weakened demand and some easing in input price pressures from the peak levels seen earlier this year.
It is evident that manufacturers are generally now finding life much more challenging. Domestic demand for manufactured goods is being held back by serious headwinds, notably including tightening fiscal policy and the major squeeze on consumers’ purchasing power, while a marked slowdown in global growth is clearly limiting export orders appreciably. Meanwhile, although they have come off their highs, persistently elevated input costs have been a problem for manufacturers.
CBI Distributive Trades Survey for October
The CBI's distributive trades' survey (Thursday) is expected to show that sales were weak in October, thereby indicating that the surprise increase of 0.6% month-on-month (m/m) in retail sales volumes reported by the Office for National Statistics for September was a temporary spike—perhaps influenced by the good weather late in the month and some sales being made up after being lost in August to the riots in London and some other cities.
Specifically, we expect the CBI survey to show the balance of retailers reporting that sales were up year-on-year remained at -15% in October, after falling to this level in September from -14% in August, -5% in July, and +21% in April. This would keep the balance down at its lowest level since May 2010. Furthermore, the balance is substantially below the average level of +42% seen in the second half of 2010. It averaged +16% in the first half of 2011.
It is hard to be optimistic about the prospects for consumer spending. Sharply squeezed purchasing power, mounting unemployment, depressed confidence, and a moribund housing market are likely to cause consumers to keep their hands in their pockets. The squeeze on consumers’ purchasing power has been highlighted by latest data showing consumer price inflation spiked to 5.2% in September while annual underlying earnings growth was limited to 1.6% in August.
The only really good news for consumers at the moment is that it is very clear the Bank of England is not going to raise interest rates for some considerable time to come. We do not expect a move before 2013.
Further out, inflation is expected to fall markedly in 2012, which will ease the squeeze on consumers’ purchasing power, but unemployment is likely to rise appreciably further and wage growth looks set to remain muted so the overall environment will still be very tough for consumers.
Consumer Confidence in October
The GfK/NOP consumer confidence index (overnight Thursday/Friday) is forecast to show that sentiment weakened anew in October to be at a 31-month low. Confidence edged up in September after falling over the previous three months. Specifically, we expect the GfK NOP consumer confidence index (which is carried out on behalf of the European Commission) to have fallen to -33 in October after edging up to -30 in September from -31 in August. It had previously retreated to the August low from -21 in May. In fact, this would be one of the lowest readings seen in the 37-year history of the survey and substantially below its long-term average of -9.
We expect already very weak consumer confidence to have taken a further hit in October from recent, largely ailing economic data and surveys, fueling concern the UK could be heading towards recession again. There is also likely to be increased pessimism over job prospects, given the recent clear deterioration in the labor market and the worrying economic outlook. On top of this, current rising inflation is increasingly squeezing purchasing power. In addition to the worrying UK economic news, consumers are likely to have been perturbed by global financial market turmoil and the heightened Eurozone sovereign debt crisis.
House Prices in October
The Nationwide lender is expected to report during the week that house prices were flat m/m in October. Houses prices could only edge up 0.1% m/m in September after dropping 0.6% in August. Nevertheless, house prices would be up a modest 0.4% y/y in October after being down 0.3% y/y in September because they fell 0.8% m/m in October 2010.
We currently see house prices falling around 5% from current levels by mid-2012. Furthermore, we believe there are mounting downside risks to this forecast. We suspect consumers’ squeezed purchasing power, tightening fiscal policy, a weakening labor market, and major concerns over the economic outlook will limit potential buyers and weigh down on house prices. There is significant concern that banks’ future ability to lend to home buyers could be hit by difficult wholesale funding conditions.
These factors are seen outweighing the support to house prices coming from extended very low interest rates. Admittedly, the squeeze on consumers’ purchasing power should ease as 2012 progresses as inflation falls markedly, but unemployment is likely to rise appreciably further and wage growth looks set to remain muted so the overall environment will still be very tough for households.