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15/01/2011 | Consumer Price Inflation, Unemployment, and Retail Sales Head U.K. Economic Releases for the Week Beginning 17 January

Howard Archer

Consumer price inflation is likely to have moved up in December, labor market data are likely soft, and retail sales should have been limited in December by the severe weather. On a more positive note, the manufacturing sector is expected to have extended its end-2010 buoyancy into 2011.

 

RICS Housing Market Survey for December

The December housing market survey from the Royal Institute of Chartered Surveyors(RICS; out overnight Monday/Tuesday) needs to be examined bearing in mind that housing market activity was likely dampened appreciably during the month by the severe weather. If the figures can be taken at face value, of key interest will be if a trend is developing of fewer properties coming onto the market. The November RICS survey revealed the balance of surveyors reporting an increase in instructions remained at -4, having originally dropped to this level in October from +22 in September. The modest fall in the number of properties coming onto the market in October and November followed eight months of gains.

If there is a sustained fall in the number of houses coming on to the market, it would provide some support for house prices. Nevertheless, the November survey also revealed buyer enquiries fell for a sixth successive month and at an increased rate, with the balance declining to -18% from -12% in October. Consequently, the housing demand/supply balance remained in favor of buyers. Meanwhile, we expect the RICS survey to reveal that the balance of surveyors reporting that house prices increased over the previous three months was unchanged at -44% in December, after improving modestly to this level in November from the 18-month low of -49% in October.

Further evidence of softening house prices is expected to come on Tuesday when theDepartment for Communities and Local Government (DCLG) releases data for November. 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. Latest data from the DCLG show that seasonally adjusted house prices edged down 0.1% month-on-month (m/m) in October, after a fall of 0.8% m/m in September. As a result, the year-on-year increase in house prices slowed to 5.5% in October from 6.1% in September and a peak of 10.6% in May.

We expect house prices to trend down gradually to lose around 10% from their peak 2010 levels by the end of 2011. This implies that house prices are likely to fall by a further 6–7% during 2011. High (and likely to rise) unemployment, muted wage growth, an increasing fiscal squeeze, low consumer confidence, difficulties in getting a mortgage, a housing supply/demand balance currently firmly in favor of buyers, and a house price/earnings ratio above long-term norms are a poor combination of factors for house prices. Low interest rates and the current stamp-duty holiday for first-time buyers on all properties costing up to £250,000 only partially offset these adverse factors—especially as it is difficult for many people to get a mortgage.

Much will obviously depend on mortgage availability, the amount of houses coming onto the market, and how well the economy holds up as the fiscal squeeze increasingly kicks in. Also critical will be when will the Bank of England start to raise interest rates? Any early interest-rate hike in 2011 would be bad news for the housing market—not just the rate rise itself, but also through the impact on potential house buyers' psychology resulting from the fact that they would be facing rising interest rates.

Inflation in December

Data out Tuesday are expected to show annual consumer price inflation climbed to a seven-month high of 3.4% in December, from 3.3% in November and 3.1% in September. This would take consumer price inflation further above the Bank of England's target rate of 2.0%. Core consumer price inflation is seen remaining at 2.7% in November.

We expect higher oil and commodity prices to have had an upward impact on consumer price inflation in December, while food prices remain elevated. Petrol prices rose in December and utility bills increased. The evidence also suggests the severe weather in December did not push retailers into offering significantly more discounts and promotions to try to boost sales. Specifically, the British Retail Consortium (BRC) reported that overall shop price inflation rose to 2.1% in December from 2.0% in November. Food price inflation was stable at 4.0% in December, while nonfood inflation rose to 1.1% in December from 0.9% in November.

Consumer price inflation looks likely to near 4.0% over the next few months (we currently forecast a peak of 3.8%) because of higher oil and commodity prices, as well as elevated food prices. Furthermore, value-added tax (VAT) rose from 17.5% to 20.0% in early January, although this may not actually push the annual inflation rate up, given there was also a VAT hike in January 2010 (to 17.5% from 15.0%).

Consumer price inflation will hopefully move below 3.0% late in 2011 as the upward impact from VAT developments, higher energy, commodity, and food prices, and sterling's past sharp depreciation wanes. Meanwhile, underlying inflationary pressures should be limited by appreciable excess capacity, likely muted growth in 2011, strong competition on the high street, and high unemployment. Inflation will hopefully dip below 2.0% early in 2012 as the impact of the January 2011 VAT hikes drops out.

Unemployment in December

Data on Wednesday are forecasted to show claimant-count unemployment was flat in December. Claimant-count unemployment edged down 1,200 in November, to be at a 20-month low of 1.4627 million. Actually, claimant-count unemployment has been posting a mixture of small losses and gains since August. In contrast, there were regular claimant-count unemployment falls around 30,000 during February–May 2010. The claimant-count unemployment rate should have remained at 4.5% in December, where it has been since June 2010. This is down from the 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 rising 45,000 in the three months to November to stand at 2.49 million, thereby keeping the ILO unemployment rate at 7.9%. Unemployment on the ILO measure rose 35,000 in the three months to October. ILO data are also likely to show that employment fell around 20,000 in the three months to November, after dropping 33,000 in the three months to October.

Labor market data may well be mixed in the near term, but we expect a modest deteriorating trend to emerge as 2011 progresses. We suspect unemployment is headed up in 2011 as a consequence of slower, below-trend growth, rising business caution and public-sector jobs being increasingly pared. Specifically, we forecast unemployment on the ILO measure to rise to 2.65 million by end-2011 and to peak around 2.75 million around mid-2012. This would see the unemployment rate rise to 8.4% by end-2011 and to a peak of 8.6% in mid-2012.

Major job losses will occur in the public sector as the government slashes spending, and we doubt the private sector will be able to fully compensate for this. We suspect firms will become increasingly cautious in their employment plans, reflecting slower growth and concerns that the intensified fiscal squeeze will hold back economic activity for an extended period. There are also likely to be significant job losses in private companies supplying services or goods to the public sector. In particular, many firms are likely to try to meet any increase in business through greater use of the workers they have already or through part-time staff, and they are likely to be reluctant to take on any more permanent staff unless they are really convinced that sustained improvement in their business is probable.

Meanwhile, earnings growth is expected to have been broadly stable in December, thereby remaining very low compared with past norms, reflecting relatively high unemployment, workers' job insecurity, and the ongoing need for companies to limit their costs in a challenging environment. Annual underlying average weekly earnings growth (regular pay excluding bonus payments) is seen limited to 2.3% in the three months to November. Meanwhile, annual average weekly earnings (total pay) growth should have risen 2.2% in the three months to October.

Future pay developments will play a critical role in determining when and how quickly the Bank of England will raise interest rates. Households' inflation expectations are rising, but as long as this does not feed through to markedly higher wage growth, the Bank of England will probably hold fire on interest rates for some time to come despite current high, above-target consumer price inflation. We expect wage growth will remain muted because of workers' weak bargaining position, given high and likely-to-rise unemployment.

Retail Sales in December

Trying to forecast retail sales in December (Friday) is a lottery, given the mixed reports about just how much of a dampening impact the severe weather had on retail activity. There had also been the expectation that sales would have been lifted in December by shoppers looking to buy big-ticket items ahead of VAT rising from 17.5% to 20.0% on 4 January. The BRC's December survey indicated that retail sales were significantly affected but did not collapse. Specifically, the BRC reported total retail sales rose 1.5% y/y in December while sales were down 0.3% y/y on a like-for-like basis (which strips out the effect of additional floor space). On balance, we forecast retail sales volumes were flat m/m in December, causing them to be up by 1.2% y/y.

The suspicion is that consumer spending will be limited in 2011, and we expect it to only rise around 1% in real terms over the year. Consumer confidence is low while the substantial fiscal squeeze will increasingly hit public-sector jobs and consumers' pockets, starting with the already enacted VAT hike. Households face high unemployment, negative real earnings growth and elevated debt levels. On top of this, the weakness of the housing market is likely to have a dampening impact on consumer spending. Furthermore, rising energy and petrol prices, and elevated food prices, are limiting the ability of many consumers to make discretionary purchases.

CBI Industrial Trends Survey for January

We expect the Confederation of British Industry (CBI) industrial trends survey for January (Thursday) to show the balance of manufacturers reporting that their orders are at normal levels remained robust at -5% in January. While modestly down from December's 30-month high of -3% (up sharply from -15% in November), this would be well above the orders' balance long-term average of -18%. December's improvement was helped substantially by higher foreign demand as the export orders balance surged to a 15-year high of +4%.

Latest data and survey evidence point to ongoing healthy manufacturing activity.Manufacturers largely benefited through 2010 from healthier demand both at home and overseas, improved competitiveness in both domestic and foreign markets stemming from the weak pound and a major rebuilding of stocks after they had been slashed during the recession.

While the manufacturing sector looks to have entered 2011 in good shape, a key question is how well can manufacturing activity hold up as 2011 progresses. During the year, stock rebuilding will draw to a close, tighter fiscal policy will weigh on domestic demand, and problems in the Eurozone will threaten foreign orders.


18 Jan - RICS House Price Balance, December: -44
18 Jan - DCLG House Prices, November (Year-on-Year): not forecast
18 Jan - Consumer Price Inflation, December (Month-on-Month): +0.7%
18 Jan - Consumer Price Inflation, December (Year-on-Year): +3.4%
18 Jan - Core Consumer Price Inflation (ex Food, Drink, Tobacco), December (Year-on-Year): +2.7%
18 Jan - Retail Price Inflation, December (Month-on-Month): +0.6%
18 Jan - Retail Price Inflation, December (Year-on-Year): +4.7%
18 Jan - Underlying Retail Price Inflation, December (Month-on-Month): +0.6%
18 Jan - Underlying Retail Price Inflation, December (Year-on-Year): +4.7%
19 Jan - Claimant-Count Unemployment Rate, December (%): 4.5%
19 Jan - Claimant-Count Unemployment Change, December (000s): 0
19 Jan - International Labour Organization Unemployment Rate, November (%): 7.9%
19 Jan - Average Weekly Earnings - total pay, November (3-Month/Year): +2.2%
19 Jan - Average Weekly Earnings - regular pay excluding bonus, November (3-Month/Year): +2.3%
20 Jan - CBI Industrial Trends, Total Orders, January: -5%
21 Jan - Retail Sales, December (Month-on-Month): +0.0%
21 Jan - Retail Sales, December (Year-on-Year): +1.2%

Global Insight (Reino Unido)

 


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