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11/09/2010 | Inflation, Unemployment, and Retail Sales are Key U.K. Economic Releases in Week Commencing 13 September

Howard Archer

Unemployment is seen falling modestly further, but the improvement in the labour market may be faltering. Retail sales are likely to have seen reasonable, if unspectacular, growth in August. Meanwhile, inflation may have continued to retreat gradually in August.

 

RICS Housing Market Survey for August

The August 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 July RICS survey showed that the number of new properties coming on to the market had risen at the fastest rate since May 2007. This is particularly significant as a shortage of properties was a major factor in the recovery in house prices from their early-2009 lows. In contrast, the RICS survey showed buyer interest fell in July for the second successive month. 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 -10% in August after plunging to -8% in July from +8% in June and +21% in May. This was the first negative balance since July 2009.

Further evidence of softening house prices is expected to come on Tuesday when theDepartment for Communities and Local Government (DCLG) releases data for July. 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. The June data from the DCLG showed that house prices were flat month-on-month, thereby causing the year-on-year increase to have moderated to 9.9% from 10.6% in May.

Housing market activity is currently low, the economic fundamentals for the sector are far from ideal (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. Meanwhile, more properties have been coming on to the market for some time now, thereby moving the supply/demand balance 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 final months of 2010. Furthermore, house prices look likely to be under pressure 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, and the drop could well be steeper still, 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 10% lower by end 2011.

Inflation in August

Data out on Tuesday are expected to show annual consumer price inflation eased back further to 2.9% in August, after moderating to 3.1% in July from 3.2% in June and a 17-month high of 3.7% in April. While this would still be appreciably above the Bank of England's target rate of 2.0%, it would at least be a further move in the right direction and point to inflationary pressures gradually easing.

Core consumer price inflation fell back markedly to 2.6% in July from 3.1% in June. We suspect it may have edged down further to 2.5% in August, as many shops continued to offer significant discounts and promotions. Some service companies may have also felt the need to price more competitively in August as activity faltered. Indeed, the prices charged index of the purchasing managers' survey for the services sector showed prices rising at a reduced rate in August, and only marginally, thereby pointing to limited pricing power. It is likely that higher food prices had an upward impact on inflation in August.

Meanwhile, annual underlying retail price inflation is expected to have moderated to 4.6% in August from 4.8% in July. 5.0% in June and a peak of 5.4% in April, while the year-on-year increase in headline retail prices is also forecast to have narrowed to 4.6% in August from 4.8% in July, 5.0% in June and a peak of 5.3% in April.

Consumer price inflation may trend down modestly further over the rest of 2010, although much will depend on what happens with food prices. Given that oil prices tended up over the final months of 2010, oilprice-related base effects should become more favourable barring a sharp rise in oil prices over the coming months. Meanwhile, underlying price pressures should be contained by substantial excess capacity, likely bumpy and overall gradual recovery, wage moderation amid high unemployment and job insecurity, and the need for retailers to price competitively in the face of 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. While consumer price inflation could be down to around 2.7% by the end of 2010, further downward progress will be limited by value-added tax 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 August

Data on Wednesday are forecast to show that claimant count unemployment fell by a modest 5,000 in August. This would follow drops of 3,800 in July and 15,900 in June, and would be well down from the declines around 30,000 seen in May and April. Nevertheless, it would bring down the number of claimant count unemployed to a 17-month low of 1.4562 million. The claimant count unemployment rate is anticipated to remain at 4.5% in August, having previously fallen to this level 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, the number of jobless on the International Labour Organization (ILO) measure is seen falling by 35,000 in the three months to July to stand at 2.440 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 further in the three months to July. However, this is likely to be mainly due to a significant increase in the number of part-time workers.

Unemployment may edge down further in the near term, but we suspect that it could well start heading back up before the end of 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 appreciably in the second half of this year after the sharp improvement in the second quarter and to be relatively muted in 2011.

Consequently, we see unemployment on the ILO measure rising to a peak around 2.85 million in the first half of 2012, with the unemployment rate reaching 9.0%.

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 limited to 1.6% in the three months to July. Meanwhile, annual average weekly earnings (total pay) growth is also expected to be limited to be 1.6% in the three months to July.

Retail Sales in August

Retail sales volumes (out on Thursday) are forecast to have risen by a reasonable 0.3% month-on-month in August, after jumping 1.1% in July. This would leave retail sales 2.0% higher year-on-year. Survey evidence for August from the Confederation British Industry (CBI) was robust, but the British Retail Consortium's (BRC) survey was not as strong. As the BRC survey is released much later in the month than the CBI's this suggests that retail sales may have moderated towards the end of August. Nevertheless, retail sales are likely to have gained overall support during August from the good weather at the start of the month, decent discounting and promotions on the high street, and people looking to enjoy their summer holidays.

The suspicion is that, going forward, consumers will find life hard and will be constrained in their spending. The substantial fiscal squeeze will increasingly hit public sector jobs and consumers' pockets, while households already face high unemployment, muted earnings growth and elevated debt levels.

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.

CBI Industrial Trends Survey for September

The Confederation of British Industry (CBI) industrial trends survey for September is out on Thursday, and it is expected to show that the balance of manufacturers reporting that their orders are at normal levels retreated to -17% from a 24-month high of -14% in August.

The manufacturing sector enjoyed a very decent first half of 2010, but it is likely to find it very difficult to sustain this performance. Manufacturers have benefited from healthier demand both at home and overseas, improved competitiveness in both domestic and foreign markets stemming from the weak pound, and a need to rebuild stocks after they were pared during the recession. The suspicion is that manufacturers will see softer growth over the coming months as inventory adjustment comes to an end, tighter fiscal policy increasingly bites, and global growth slows.


14 Sep - RICS House Price Balance, August: -10

14 Sep - DCLG House Prices, July (Year-on-Year): not forecast

14 Sep - Consumer Price Inflation, August (Month-on-Month): +0.3%

14 Sep - Consumer Price Inflation, August (Year-on-Year): +2.9%

14 Sep - Core Consumer Price Inflation (ex Food, Drink, Tobacco), August (Year-on-Year): +2.5%

14 Sep - Retail Price Inflation, August (Month-on-Month): +0.3%

14 Sep - Retail Price Inflation, August (Year-on-Year): +4.6%

14 Sep - Underlying Retail Price Inflation, August (Month-on-Month): +0.3%

14 Sep - Underlying Retail Price Inflation, August (Year-on-Year): +4.6%

15 Sep - Claimant Count Unemployment Rate, August (%): 4.5%

15 Sep - Claimant Count Unemployment Change, August (000s): -5

15 Sep - International Labour Organization Unemployment Rate, July (%): 7.8%

15 Sep - Average Weekly Earnings - total pay, July (3-Month/Year): +1.6%

15 Sep - Average Weekly Earnings - regular pay excluding bonus, July (3-Month/Year): +1.6%

16 Sep - Retail Sales, August (month-on-month): +0.3%

16 Sep - Retail Sales, August (year-on-year): +2.0%

16 Sep - CBI Industrial Trends, Total Orders, September: -17%

Global Insight (Reino Unido)

 


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