Trade Deficit in July

The total trade deficit (out Tuesday) is expected to have narrowed to GBP3.2 billion in July after spiking to a record GBP4.3 billion in June from GBP2.7 billion in May. We suspect that the two days’ public holiday in June for the Queen’s Diamond Jubilee celebrations hit exports more than imports, and therefore caused the trade deficit to widen that month. So we expect to see some correction to this in the July data, although the underlying picture is likely to remain disappointing, given the difficult environment that UK exporters are facing.

Worryingly for the UK, it was not just exports to the Eurozone that were weak in June. While exports of traded goods to European Union countries fell 7.2% month-on-month in June, they were down by an even larger 9.2% to non-EU countries.

The record deficit in June capped a hugely disappointing UK trade performance in the first half of 2012. Negative net trade contributed 1.0 percentage point to the GDP contraction of 0.5% quarter-on-quarter (q/q) in the second quarter as real exports to goods and services contracted 1.7% q/q while imports rose 1.4% q/q. Net trade was also negative in the first quarter when it contributed 0.4 percentage point to the GDP contraction of 0.3% q/q.

Hopes that net trade could boost overall economic activity proved to be sadly misplaced in the first half of 2012.Although there is hope that the trade deficit narrowed appreciably in July, prospects for exports still look troublesome, given the ongoing serious problems in the Eurozone and softer economic activity elsewhere. In addition, exporters have had to cope with the hit to their competitiveness from a relatively elevated pound (although it has at least come off its late July peaks, which saw it trade at a 44-month high against the euro and a near three-year high on its trade-weighted index).

Worryingly, the latest survey evidence on foreign orders is soft. In particular, the export index of the latest purchasing managers’ survey for the manufacturing sector showed foreign orders contracting for the sixth time in seven months in August, although the rate of decline did slow sharply from July’s fall, which was the fastest drop since March 2009. Demand from Europe was reported to have remained weak in August. Meanwhile, the export orders balance of the Confederation of British Industry (CBI) industrial trends retreated to -17% in August from -9% in July and -4% in June. Even so, the export-orders balance was still just above the long-term average of -21%.

Unemployment in July

The labour market has been defying gravity in recent months, showing surprising strength in the face of the economy being back in recession. The implication is that either the economy is doing appreciably better than the national accounts data show, the labour market is doing significantly worse than the hard data show, or productivity has genuinely weakened sharply. The jury is currently very much out as to what the actual answer is, but it could very well be a combination of all three.

It is also evident that unemployment has been limited by restrained earnings growth, while an increase in people working part time and more people becoming self-employed has also helped matters.

The labour market data being released on Wednesday will be scanned for any signs that the resilience in the labour market is starting to wane in reaction to the economy’s extended weakness. However, it is very possible that there was some boost to employment in August from temporary jobs related to the staging of the Olympic Games.

Claimant-count unemployment is forecast to have been flat in August at 1.5932 million, which would keep the unemployment rate at 4.9% in July, where it has been since September 2011. Claimant-count unemployment fell by 5,900 in July after increases of 1,000 in June and 6,900 in May.

The number of jobless on the International Labour Organization (ILO) measure is seen falling by 49,000 in the three months to July to stand at 2.550 million. This would be similar to the 45,000 drop seen in the three months to June. The number of jobless on the ILO measure is down from a 17-year high of 2.685 million in the three months to November 2011. Theunemployment rate on the ILO measure is seen stable at 8.0% in the three months to July, which is down from a peak rate of 8.4% in late 2011/early 2012.

ILO data are also likely to show that employment rose by around 175,000 in the three months to July to 29.50 million. This would be down compared with growth of 201,000 in the three months to June, which took the number of employed up to 29.476 million. This figure was the highest employment level since mid-2008, and up from a low of 29,069 million in the three months to September 2011. In the three months to June, there was a rise of 130,000 in full-time workers to 21.405 million, while part-time workers were up 71,000 to reach 8.070 million.

The big question is, can the labour market remain resilient given the economy’s ongoing weakness and the current very worrying and uncertain outlook? We have serious doubts, and the latest survey evidence provides some support for this view. For example, the August survey of business conditions by the Bank of England’s regional agents reported that “Employment intentions remained fairly flat. In an uncertain environment, businesses were hesitant about committing to any changes in payroll until the outlook became clearer.” Even if employment is flat rather than falling, it will not be enough to offset job cuts in the public sector and to combat the increasing labour force.

We suspect that unemployment is headed higher later this year and will rise further in 2013 as a consequence of extended soft economic activity, heightened business caution, and public-sector jobs being pared substantially. Unless the economy starts showing sustained decent underlying improvement, firms will be under increasing pressure to release some of their workers.

We suspect that the number of unemployed on the ILO measure will reach a peak of 2.80 million in 2013, which would see the unemployment rate reach 8.7%.

Average Earnings in July

Underlying average earnings growth (Wednesday) is expected to have remained muted in July and substantially below past norms. This is the consequence of appreciable labour market slack, workers' job insecurity, and a pressing need for many companies to limit their costs in a very challenging environment. Restrained earnings growth has clearly been an important factor helping to limit unemployment levels.

Specifically, underlying average weekly earnings growth (regular pay – excluding bonus payments) is seen remaining at 1.8% in the three months to July, having originally edged up to this level in the three months to April from 1.6% in the three months to March (which was the equal lowest level since mid-2010). Annual average weekly earnings (total pay) growth is expected to have edged down to 1.5% in the three months to July from 1.6% in the three months to June. Total earnings have been limited by lower bonus payments compared with a year earlier as well as muted underlying earnings growth.

These earnings growth rates are substantially below the 4.5% level that is generally considered consistent with the Bank of England's 2.0% consumer price inflation target. They are also below current consumer price inflation levels (2.6% in July), so consumers’ purchasing power continues to be squeezed, albeit at a significantly reduced rate compared with earlier in 2012 and, more particularly, in 2011.