Revised national accounts data are finally released on Monday, having been delayed from the original release date of June 29 due to the Office for National Statistics finding "potential errors in some of the detailed figures". This has led to speculation that the release could see significant revisions from the previously released figures for the first quarter of 2010 at least.
While the release has become somewhat intriguing because of this delay, we are sticking to our expectation that GDP growth in the first quarter of 2010 will be left at 0.3% quarter-on-quarter. The year-on-year drop in GDP is also anticipated to be unrevised at 0.2%. First-quarter GDP growth was originally reported at 0.2% quarter-on-quarter but this was revised up to 0.3% in the second release. While it is possible that growth in the first quarter could be revised up further due to more data being available for March when the economy appeared to perform better, we believe this is unlikely.
The current breakdown of the first-quarter national accounts shows that GDP growth benefited from a sharp rebound in business investment after extended contraction. Meanwhile, there was an appreciable contribution from inventories as they were cut at a much reduced rate. Government spending was also positive. Consumer spending, however, was flat as it was hit by the very bad weather at the start of the year. In addition, net trade was disappointingly negative as imports rose faster than exports. On the output side of the economy, industrial production achieved robust expansion but services output grew only modestly and construction output contracted.
GDP growth in the first quarter was clearly held back by the bad weather at the start of the year. We expect GDP growth to have picked up to 0.5% quarter-on-quarter in the second quarter as some of the weather-related loss in activity in the first quarter was made up.
Going forward, we expect growth to be relatively muted and bumpy in the face of serious headwinds including increasing effects of major fiscal tightening, the Eurozone's problems (which could impact negatively on the UK in a number of ways, most notably through limiting exports), and the pressure on consumers coming from high unemployment, still falling employment, muted wage growth, high debt levels, and the fiscal squeeze. Consequently, we expect U.K. GDP growth to be limited to 1.1% in 2010. Growth is forecast at 1.7% in 2011 as it is held back by the fiscal tightening really kicking in.
British Retail Consortium Retail Sales Monitor for June
The British Retail Consortium (BRC) retail sales monitor for June (out overnight on Monday/Tuesday) is expected to show modest improvement compared with May. We expect the BRC to report that total retail sales rose 3.2% year-on-year in June, while sales are expected to have increased 1.0% on a like-for-like basis (which strips out the effect of additional floor space). The BRC previously reported that total retail sales rose 3.0% year-on-year in May after dropping 0.2% in April. Sales on a like-for-like basis rose by 0.8% year-on-year in May after falling 2.3% in April.
Retail sales are likely to have been lifted in June by the better weather and the football World Cup (despite England's pretty dismal performances). Specifically, the World Cup is likely to have lifted demand for a number of products including TV's, a wide range of world-cup related merchandise—such as replica shirts, magazines, and flags—snacking food, and alcohol and other drinks.
It is hard, however, to be optimistic about the prospects for consumer spending. Consumer confidence has been heading downwards recently, and households face serious headwinds, notably high unemployment and still falling full-time employment, muted earnings growth, elevated debt levels, high fuel prices, and January's Value-Added Tax hike from 15.0% back up to 17.5%.
The substantial fiscal squeeze will increasingly hit public sector jobs and consumers' pockets. Furthermore, the grizzly June 22 emergency budget may heighten consumers' concern about the economic outlook and jobs and increase their 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 because of heightened inflation concerns, although we still lean towards the view that they will hold fire given still-gradual recovery and the extent of the fiscal tightening that has been announced.
Longer term, retail sales will be hit by VAT rising up to 20% in January 2011, although this could bring forward some spending later this year as consumers look to make purchases of more expensive items ahead of the increase.
RICS Housing Market Survey for June
The June housing market survey from the Royal Institute of Chartered Surveyors (out overnight Monday/Tuesday) is likely to show that the supply-demand balance in the housing market is continuing to move more in favor of buyers, thereby having a limiting effect on prices. The May RICS survey showed that there had been a surge in new properties coming on the market, which was clearly influenced by the new coalition government abolishing Home Information Packs. This is particularly significant as a shortage of properties has been a major factor in the recovery in house prices from their early-2009 lows. In contrast, the RICS survey showed buyer interest only edged up in May, and it remains to be seen how it will be affected by the extra fiscal tightening measures announced in the June 22 emergency budget. 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 +20% in June, after recovering to +22% in May from an 8-month low of +10% in March. This would still be down appreciably from a high of +35% in November 2009.
Further evidence of softening house prices is expected to come on Tuesday when theDepartment for Communities and Local Government (DCLG) releases data for May. 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.
We increasingly suspect that house prices will be only flat over the rest of this year. Although it may have picked up modestly from its early-2010 lows, housing market activity remains well below long-term norms. The economic fundamentals of high unemployment, still falling full-time employment, and low earnings growth are hardly ideal, a major fiscal squeeze is starting, credit conditions remain tight, and house price/earnings ratios have moved back up. There are also concerns that the Bank of England could raise interest rates before the end of the year due to higher-than-expected inflation. Also, very significantly, more properties are coming on to the market thereby moving the supply/demand balance more in favor of buyers. Some support for house activity and prices, however, will come from the stamp duty holiday for the next two years for first-time buyers on all properties costing up to £250,000.
Inflation in June
Data out on Tuesday are expected to show annual consumer price inflation moderated to 3.2% in June after dipping to 3.4% in May from 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 June by softer oil prices. In addition, the June shop price deflator from the British Retail Consortium indicated that food inflation moderated in June while shops engaged in increased discounting and promotional activity to try to encourage reluctant consumers to spend. Core consumer price inflation is seen easing back to 2.8% in June from 2.9% in May and 3.1% in April. Meanwhile, annual underlying retail price inflation is expected to have moderated to 4.9% in June from 5.1% in May and 5.4% in April, while the year-on-year increase in headline retail prices is forecast to have narrowed to 4.9% in June from 5.1% in May and 5.3% in April.
Consumer price inflation should head down further 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 favorable, barring a renewed sharp rise in oil prices over the coming months. Indeed, oil prices have softened appreciably after peaking around US$87/barrel in April. 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 the 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. Indeed, sterling has firmed overall recently. Nevertheless, while consumer price inflation could be down to around 2.5% by the end of 2010, further downward progress 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 VAT rose to 17.5% from 15.0% in January 2010).
Unemployment in June
Data on Wednesday are likely to show that claimant-count unemployment fell by some 20,000 in June. This would be down from drops of 30,900 in May and 32,000 in April. Theclaimant-count unemployment rate is anticipated to be stable at 4.6% in June after dipping to this level in May from 4.7% in April and the 12-year high of 5.0% seen in the five months through to January. Meanwhile, the number of jobless on the International Labor Organization (ILO) measure is seen falling by 30,000 in the three months to May to stand at 2.470 million, thereby keeping the ILO unemployment rate at 7.9%.
The data are also likely to show that employment rose modestly in the three months to May. This is, however, likely to be mainly due to an increase in the number of part-time workers out-stripping still falling full-time employment.
Unemployment could well continue to fall in the near term, but it is likely to head back up later this year and then increase further in 2011. Major job losses are clearly on the way in the public sector as the government looks to slash spending, and we doubt that the private sector will be able to fully compensate for this. It may be that the private sector becomes increasingly cautious on their employment plans because of concerns that the intensified fiscal squeeze will hold back growth. In fact, we expect GDP growth to moderate in the second half of this year after likely improvement in the second quarter and then to be limited to 1.7% in 2011. We suspect that this growth will not be sufficient to prevent unemployment starting to rise again before the end of 2010 and then trending up modestly in 2011.
Meanwhile, underlying earnings growth is expected to have remained muted, 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 stable at 1.9% in the three months to May. Meanwhile, average weekly earnings growth (total pay) is expected to have moderated to 2.9% year-on-year in the three months to May from 4.2% in the three months to April as the impact of higher bonus payments at the start of the year wanes.
12 Jul - GDP, First Quarter 2010 (Quarter-on-Quarter): +0.3%
12 Jul - GDP, First Quarter 2010 (Year-on-Year): -0.2%
13 Jul - British Retail Consortium Monitor Total Sales, June (Year-on-Year): +3.2%
13 Jul - British Retail Consortium Monitor Like-for-Like Sales, June (Year-on-Year): +1.0%
13 Jul - RICS House Price Balance, June: +20
13 Jul - DCLG House Prices, May (Year-on-Year): not forecast
13 Jul - Consumer Price Inflation, June (Month-on-Month): +0.1%
13 Jul - Consumer Price Inflation, June (Year-on-Year): +3.2%
13 Jul - Core Consumer Price Inflation (ex Food, Drink, Tobacco), June (Year-on-Year): +2.8%
13 Jul - Retail Price Inflation, June (Month-on-Month): +0.1%
13 Jul - Retail Price Inflation, June (Year-on-Year): +4.9%
13 Jul - Underlying Retail Price Inflation, June (Month-on-Month): +0.1%
13 Jul - Underlying Retail Price Inflation, June (Year-on-Year): +4.9%
14 Jul - Claimant-Count Unemployment Rate, June (%): 4.6%
14 Jul - Claimant-Count Unemployment Change, June (000s): -22
14 Jul - International Labor Organization Unemployment Rate, May (%): 7.9%
14 Jul - Average Weekly Earnings - total pay, May (3-Month/Year): +2.9%
14 Jul - Average Weekly Earnings - regular pay excluding bonus, May (3-Month/Year): +1.9%