The British Retail Consortium (BRC) retail sales monitor for July (out overnight on Monday/Tuesday) is expected to have shown relatively decent sales, supported by the very good weather, some decent discounting on the high street, and a final kick up from the World Cup. The Confederation of British Industry (CBI) has already released its distributive trades survey for July, which showed that the balance of retailers reporting that sales were up year-on-year surged to a 39-month high of +33% from -5% in June and a 14-month low of -18% in May. We expect the BRC to report that total retail sales rose 3.7% year-on-year in July, while sales are expected to have increased 1.5% on a like-for-like basis (which strips out the effect of additional floor space). The BRC previously reported that total retail sales rose 3.4% year-on-year in June, while they were up 1.2% year-on-year on a like-for-like basis.

Even if the BRC survey does show decent growth in retail sales, the suspicion remains that consumers are likely to find life hard and will be constrained in their spending. Worryingly, consumer confidence sank to a 12-year low in July. The substantial fiscal squeeze will increasingly hit public sector jobs and consumers' pockets, while households already face high unemployment, muted earnings growth, elevated debt levels, and high fuel prices. There is also the possibility that the Bank of England could start to raise interest rates before the end of the year due to heightened inflation concerns, although we believe that this is unlikely.

Longer term, retail sales will be hit by Value-Added Tax rising from 17.5% 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 July

The July 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 favour of buyers, thereby having a limiting impact on prices. The June RICS survey showed that the number of new properties coming on to the market had risen at the fastest rate since May 2007, which was clearly influenced by the 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 fell in June for the first time since the beginning of the year (when it was curtailed by the very bad weather). Meanwhile, we expect the RICS survey to reveal that the balance of surveyors reporting that house prices increased over the previous three months fell back further to +5% in July after plunging to an 11-month low of +9% in June from +26% in May.

Further evidence of softening house prices is expected to come on Tuesday when theDepartment for Communities and Local Government (DCLG) releases data for June. The consensus is for the year-on-year increase to have moderated to 9.8% in June from 11.0% in 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.

Housing market activity is currently low, the economic fundamentals are far from ideal for the housing market (notably high unemployment and muted wage growth), a major fiscal squeeze is getting underway, and house price/earnings ratios have moved up overall from their early-2009 lows and are above their long-term averages.

On top of this, credit conditions remain tight with mortgages still hard to get for many people. Furthermore, household confidence has deteriorated markedly to be at a 12-month low in July, as concerns over both personal financial situations and the economic outlook have been fuelled by the extra austerity measures that were announced in June's emergency budget. There are also concerns that the Bank of England will raise interest rates before the end of the year due to sticky, above-target inflation. The more worried consumers are, the less likely they will want to commit to buying a house.

Meanwhile, more properties have been coming on to the market for some time now, thereby moving the supply/demand balance more in favour of buyers. On the positive side, some support for house activity and prices will come from the current stamp duty holiday for first-time buyers on all properties costing up to £250,000. Interest rates are likely to stay low for an extended period to offset the fiscal tightening.

On balance, while we believe that a sharp correction in house prices is unlikely, we do expect them to ease back by around 3% over the second half of 2010. Furthermore, it is hard at this stage to be optimistic about house prices in 2011, as the fiscal squeeze will increasingly kick in, which will hit people's pockets and lead to serious job losses in the public sector. Consequently, a further drop of around 5% in house prices looks highly possible in 2011, although much will depend on mortgage availability and the amount of houses coming on to the market. Therefore, we believe that house prices could be some 8-10% lower by end-2011 compared to their mid-2010 levels.

Trade Deficit in June

The total trade deficit (out Tuesday) is expected to have narrowed to £3.5 billion in June from a 22-month high of £3.8 billion in May. Nevertheless, this would still be above the average monthly deficit of £3.3 billion so far in 2010 and well above the average monthly deficit of £2.7 billion in 2009. Within, this, the visible trade deficit is forecast to have shrunk to £7.6 billion in June from £8.1 billion in May. This would again still be higher than the average monthly deficit of £7.5 billion so far in 2010 and well above the 2009 monthly average of £6.8 billion.

The U.K.'s trade performance so far in 2010 has been disappointing. Exports have picked up only modestly despite generally firmer global growth and the competitive level of the pound. Furthermore, export growth has been out-stripped by import growth, which has been lifted by improvement in U.K. domestic demand. Consequently, hopes that net trade would contribute to growth and help the economy re-balance have so far been dashed. Indeed, net trade lopped a substantial 0.9 percentage point off first-quarter GDP growth of 0.3% quarter-on-quarter and it looks like net trade was negative again in the second quarter despite overall economic growth of 1.1% quarter-on-quarter.

Worryingly, there are growing concerns that U.K. exports could be hit significantly by slowing global growth and significant problems in the Eurozone. Furthermore, the pound has firmed overall, hitting a near 11-month high on its trade-weighted index in early August. Reinforcing the concerns over export prospects, the export orders index of the July manufacturing purchasing managers' survey slumped to an 11-month low in July and pointed to minimal growth.

Unemployment in July

Data on Wednesday are forecast to show that claimant count unemployment fell by 17,000 in July. This would be down from drops of 20,800 in June and 31,100 in May, but would nevertheless bring the number of unemployed down to a 17-month low of 1.443 million. Theclaimant count unemployment rate is anticipated to dip to 4.5% 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, thenumber of jobless on the International Labour Organization (ILO) measure is seen falling by 65,000 in the three months to June to stand at 2.445 million, thereby resulting in an ILO unemployment rate of 7.8%. This would be down from the peak rate of 8.0%.

The data are also likely to show that employment rose modestly in the three months to May. This is likely to be mainly due to a significant increase in the number of part-time workers. Full-time employment is likely to have only edged up.

Unemployment could well continue to fall in the near term, but we suspect that it will start to head back up later this year and then increase further in 2011. 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.

Indeed, it may well be that the private sector becomes increasingly cautious in their employment plans due to concerns that the intensified fiscal squeeze will hold back growth. 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 in the second half of this year after the sharp improvement in the second quarter and then to be limited to 1.7% in 2011. Consequently, while we expect unemployment to fall further in the near-term, we suspect that it will start to edge up again before the end of 2010 and then rise further in 2011 and early-2012.

Meanwhile, 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 moderating to 1.6% in the three months to June. Meanwhile, average weekly earnings (total pay) growth is expected to be limited to just 1.2% in June as the impact of higher bonus payments at the start of the year drops out.

Bank of England Quarterly Inflation Report for August

Following the Monetary Policy Committee's decision to keep interest rates down at 0.50% and the stock of Quantitative Easing unchanged at £200 billion at the conclusion of their 4-5 August meeting, attention will focus on the Bank of England's Quarterly Inflation Report for August (out on Wednesday). The new GDP growth and consumer price inflation forecasts contained in the report (which the MPC would have had available at their meeting) will provide important insights into how monetary policy is likely to develop in both the near-term and over a two-year horizon.

The Bank of England is likely to have had the unpleasant task of lowering its GDP growth forecasts, but raising its consumer price inflation projections. This likely rise in the consumer price inflation forecast is not only expected to be due to the current stickiness of inflation, but also due to the impact of Value-Added Tax rising from 17.5% to 20.0% in January 2011. The extra tightening of fiscal policy announced by the new coalition government in June (which included next January's VAT hike) and signs of slowing growth is also likely to lead the Bank of England scaling back its GDP growth forecast for 2011. We expect the Bank of England's forecasts to show that consumer price inflation will now get back down to its 2.0% target level in 2012 rather than in the first quarter of 2011.

Even so, the forecasts are likely to still indicate that interest rates are unlikely to rise any time soon and will only increase very gradually when they eventually do start to rise. The Bank of England is also likely to indicate that further Quantitative Easing remains a possibility should the recovery falter markedly.