A relatively light week for UK indicators is likely to show retail sales were decent in June as they were helped by the Queen’s Diamond Jubilee celebrations. This is likely to be countered by soft industrial production in May and a disappointing trade performance.
British Retail Consortium Retail Sales Monitor for June
The British Retail Consortium (BRC) retail sales monitor (out overnight on Monday/Tuesday) is expected to show relatively decent retail sales in June. It is likely sales were lifted in June by the Queens’s Diamond Jubilee celebrations as consumers bought food and drink for street parties and other events, purchased souvenirs, and also took advantage of the extra day’s public holiday to go to the shops. It is also possible that a recent easing of the squeeze on consumers’ purchasing power supported sales in June. Reduced petrol prices and a drop-off in annual food inflation are freeing up a little more money for discretionary purchases. The BRC has already reported that the year-on-year increase in its shop price index retreated to a 31-month low of 1.1% in June, from 1.5% in May.
The consensus forecast is for the BRC to report that retail sales values rose 2.0% year-on-year (y/y) in June on a like-for-like basis (which strips out the effect of additional floor space). Like-for-like sales rose 1.3% y/y in May, while total retail sales values increased 3.4% y/y in May.
The Confederation of British Industry (CBI) has already released its distributive trades’ survey for June, which showed significant improvement. Specifically, the CBI survey showed the balance of retailers reporting sales were up y/y jumped to an 18-month high of +42% in June from +21% in May and -6% in April. This was also well above the overall average of +3% for 2011. Most sectors saw y/y sales growth in June, with grocers doing particularly well as people stocked food and drink for their celebrations. Even so, the CBI indicated a balance of 10% of retailers reported sales were still below usual levels for the time of year.
Retailers will be very much hoping the Olympics will provide a significant lift to their sales over the coming weeks as people buy related merchandise and souvenirs and extra drink and food to enjoy watching the Games. The Olympic Games may also lead to more people upgrading their televisions. An extended burst of good weather would also go down well with retailers as it would lift demand for summer clothing and outdoor goods.
There are some recent hopeful developments for retailers. The squeeze on consumers’ purchasing power has eased recently with inflation coming down to a 30-month low of 2.8% in May, having been as high as 5.2% last September. Furthermore, the marked drop in petrol prices and an easing in food price inflation may free up a little more spending power of consumers on discretionary purchases. Meanwhile, latest data show employment rose 166,000 in the three months to April, while consumer confidence has edged up overall from a low in April.
It seems unrealistic to expect any major pickup in consumer spending in the near term at least. Consumer confidence is still very low, while there is currently still a significant squeeze on consumers’ purchasing power as consumer price inflation of 2.8% in May was still nearly a full percentage point above annual earnings growth of 1.9% in April. Furthermore, tighter fiscal policy is also adding to the squeeze on some consumers. Latest data show households’ real disposable income fell 0.9% quarter-on-quarter (q/q) in the first quarter of 2012 and was down 0.1% y/y.
Meanwhile, unemployment is still high, with many of the job gains being in part-time or low-paid work, or due to a rise in self-employment. On top, there is a need for many consumers to deleverage.
The recent sharp overall drop in oil prices boost hopes that consumer price inflation will continue to fall back over the coming months and further ease the squeeze on consumers. Nevertheless, unemployment is likely to remain high (and could very well move back up) and wage growth muted so the overall environment will likely still be pretty tough for consumers.
RICS Housing Market Survey for June
Of key interest in the housing market survey from the Royal Institution of Chartered Surveyors (overnight Monday/Tuesday) will be whether activity and buyer interest showed any sign of picking up in June after losing momentum overall in May and April following the ending of the concession for first-time buyers on 24 March. The May survey revealed that the new buyer enquiries net balance fell to -1% from +5 % in April and +10% in March.
Also of interest will be how many properties are coming on to the market, as there is the possibility that a shortage of properties could provide some support to house prices. The May survey revealed the new vendor instructions net balance weakened to -3% from +1% in both April and March.
Meanwhile, we expect the RICS survey to reveal that the balance of surveyors reporting that house prices rose over the previous three months edged back to -18% in June after rising to -16% in May from -19% in April. It fell sharply to April’s level from -11% in March.
We suspect house prices will drift lower over the second half of 2012 in the face of limited activity, low and fragile consumer confidence, muted earnings growth, and high unemployment. We expect house prices to end up losing around 3% from current levels. Furthermore, there remains a significant danger that house prices could fall even more than this due to the serious downside risks to the UK economic outlook, particularly stemming from the problems in the Eurozone.
Housing market activity is persistently low compared with long-term norms and while it may eventually be lifted by more mortgages being granted at decent interest rates under the “funding for lending” scheme recently announced by the Bank of England and the Treasury, this is unlikely to be a major factor in the near term at least.
It is possible house prices will gain some support from a shortage of properties on the market but this tends to vary markedly between regions as a factor. Meanwhile, although mortgage interest payments as a percentage of disposable income are currently very low, other affordability measures are not so favorable with the house price/earnings ratio above its long-term average.
Industrial Production in May
We expect manufacturing output (Thursday) to have edged up just 0.2% month-on-month (m/m) in May after dropping 0.7% m/m in April. This would cause manufacturing output to be down 1.7% y/y in May. Manufacturing survey evidence for May from the purchasing managers and the CBI was very weak, so at best it seems output only edged up after suffering a particularly sharp drop in April. There is a very real risk that manufacturing output fell further in May.
Meanwhile, overall industrial production is seen dipping 0.1% m/m in May after stagnating in April and falling 0.3% in March. This would leave industrial production down 2.0% y/y in May. Industrial production is expected to have been pulled down in May by a marked fall in energy output after it surged in April amid particularly bad weather.
UK manufacturers clearly face a very challenging domestic and international environment. Domestic demand for manufactured goods is handicapped by the still-serious problems facing consumers as well, tightening public spending, and the current uncertain and worrying economic environment leading to orders being delayed or cancelled. Meanwhile, Eurozone economic weakness, in particular, is limiting overall foreign demand for UK manufactured goods. In addition, exporters have had to cope with the pressure on their competitiveness coming from sterling hitting a 33-month high on a trade-weighted basis in May.
Manufacturers are helped by the sharp fall in oil prices reducing the squeeze on their margins and giving them more scope to price competitively. In addition, sterling has fallen from its May trade-weighted peak level, although it is currently still trading near its highest level for three-and-a-half years against the euro.
Trade Deficit in May
The total trade deficit (Friday) is expected to have narrowed to GBP3.2 billion in May after jumping to GBP4.4 billion in April (the second-largest shortfall since monthly records began in January 1998) from GBP3.0 billion in March. Even so, it would still be well above the 2011 average monthly deficit of GBP2.3 billion. Within this, the traded goods deficit is seen narrowing to GBP8.9 billion in May, after spiking to GBP10.1 billion in April from GBP8.7 billion in both March. Again, though, this would still be appreciably above the 2011 average monthly deficit of GBP8.3 billion.
Some of the reduction in the trade deficit in May is likely to be the consequence of lower oil prices. The United Kingdom’s deficit in its net oil balance hit a peak of GBP1.4 billion in March when oil prices peaked, but it was down to GBP1.2 billion in April and should have benefited in May from a marked retreat in oil prices.
The April trade data were hugely disappointing, increasing the risk that net trade was again negative in the second quarter and that the economy suffered further GDP contraction. Exports of goods and services worryingly plunged 5.1% m/m to GBP39.4 billion in April, while imports fell 1.4% to GBP43.8 billion.
The marked fall in UK exports in April highlighted the pressure on overseas demand coming from weakened global growth. Unsurprisingly given the region’s problems, exports of traded goods to the Eurozone fell substantially in April (6.3% m/m), but it was notable and worrying that exports to non-European Union countries fell even more (by 10.3% m/m). This did little for hopes that exports to other regions than the Eurozone can help offset weakness in the single currency area.
Meanwhile, the fall in UK imports in April pointed to muted domestic demand.
The UK has been looking to improved net trade to boost overall economic activity. Nevertheless, in the first quarter of 2012 net trade was markedly negative and contributed 0.4 percentage point to GDP contraction of 0.3% q/q.
Of particular concern to UK exporters is likely very weak economic activity in the Eurozone for some time to come. This is the major destination for UK exports. On top of this, UK exporters have had to cope with sterling hitting a three-and-a-half-year high against the euro and a 33-month high on a trade-weighted basis in mid-May. Sterling is currently still trading close to its three-and-a-half-year peak level against the euro, but it has eased from its 33-month trade-weighted peak.
Latest survey evidence on foreign orders is mixed. The export orders balance of the CBI industrial trends rose to a four-month high of -4% in June after relapsing to a four-month low of -12% in May from -10% in April and -2% in February. This took the export orders balance well above the long-term average of -21%. Nevertheless, the export index of the latest purchasing managers’ survey for the manufacturing sector showed foreign orders contracting for the fourth time in five months in June, although the rate of decline did at least ease compared with May and April. While demand from the Eurozone was particularly weak in June, some manufacturers also reported reduced orders from the United States and Asia.
10 July - British Retail Consortium Monitor Total Sales, June (Year-on-Year): not forecast
10 July - British Retail Consortium Monitor Like-for-Like Sales, June (Year-on-Year): not forecast
10 July - RICS House Price Balance, June: -18
12 July - Industrial Production, May (Month-on-Month): -0.1%
12 July - Industrial Production, May (Year-on-Year): -2.0%
12 July - Manufacturing Output, May (Month-on-Month): +0.2%
12 July - Manufacturing Output, May (Year-on-Year): -1.7%
13 July - Non-EU Visible Trade Balance, May (GBP/Month): -4.5
13 July - Visible Trade Balance, May (GBP/Month): -8.9
13 July - Total Trade Balance, May (GBP/Month): -3.2