Consumer price inflation is expected to have fallen further in February, which will help ease the squeeze on households’ purchasing power; however, oil prices may mean that inflation is stickier than expected. Retail sales are seen retreating modestly in February after a surprisingly strong performance in January. Public finances are seen showing modest improvement in February compared to a year earlier, which could give the chancellor a tiny bit of wiggle room in Wednesday’s budget. Nevertheless, there can be little doubt that the Chancellor will stick to his tight fiscal stance, particularly given that Fitch recently put the UK’s treasured (by the government, at least) AAA credit rating on negative outlook.
Consumer Price Inflation in February
Data out on Tuesday are expected to show that consumer
price inflation fell back further to a 15-month low of 3.3% in February, from
3.6% in January, 4.2% in December, and a three-year high of 5.2% in September
Inflation is expected to have fallen further in February
due to favourable base effects reflecting the fact that in February 2011 a
number of retailers and companies were still passing on the VAT hike from 17.5%
to 20.0% that was enacted at the start of 2011. It is also evident that many
retailers are still engaging in significant discounting and promotions to try
to get pressurized and worried consumers to part with their cash. Meanwhile, a
number of utility providers trimmed their energy tariffs in February; however,
February’s dip in inflation is likely to have been limited by higher petrol
Supporting hopes that consumer price inflation dipped
further in February, the shop price deflator produced by the British Retail
Consortium indicated that overall annual shop price inflation retreated to a
23-month low of 1.2% in February from 1.4% in January. Non-food prices fell
0.7% year-on-year in February, which was the first such deflation since
November 2009. This was down from 0.0% in January. The BRC reported that
clothing, furniture, and electricals all saw prices lower in February than a
year earlier; however, annual food price inflation rose back up to 4.2% in
February after dipping to an 18-month low of 3.7% in January from 4.2% in
December. The BRC indicated this was influenced by higher transport costs
resulting from the recent rise in petrol prices. The BRC also pointed out that
the money off total bill vouchers that are being offered by some supermarkets
are not reflected in shelf prices.
While inflation should fall back further over the coming
months, the very real danger is that it will prove stickier than had been hoped
for due to current high oil prices. It had seemed very possible that consumer
price inflation would be down to the Bank of England’s target level of 2.0% by
the end of 2012 due to the waning impact of sharply rising oil, commodity and
food prices in late 2010/early 2011, and by underlying price pressures being
diluted by weak economic activity and elevated unemployment. However, this is
looking increasingly questionable given current oil prices and the possibility
they could go higher still.
If consumer price inflation does prove to be sticky over
the coming months, this will have worrying implications for UK growth
prospects. Sticky consumer price inflation would maintain an appreciable
squeeze on consumers’ purchasing power and dilute hopes that consumers will
increasingly step up their spending as 2012 progresses. Sticky inflation would
also make it harder for the Bank of England to justify undertaking more Quantitative
Easing to support activity if the economy continues to struggle.
CBI Industrial Trends Survey for March
We expect the Confederation of British Industry (CBI)
industrial trends survey for March (out Tuesday) to indicate that manufacturing
activity is on course for expansion in the first quarter of 2012, after
contracting sharply in the fourth quarter of 2012, but it is still far from
Specifically, we forecast the balance of manufacturers
reporting that their orders are at normal levels to have fallen back to -6% in
March, after climbing to a six-month high of -3% in February from -16% in
January and a 14-month low of -23% in December. The balance had deteriorated to
December’s low from +1% in August 2011. This compares to a long-term average of
-18% for the balance.
We also expect the March CBI survey to reveal that
manufacturers generally expect to raise their production over the next three
months. Latest hard data show that manufacturing output edged up 0.1%
month-on-month in January after jumping 1.1% in December. Manufacturing output
had previously fallen or been only flat for the six months prior to December.
Although manufacturing activity has improved after a
largely torrid second half of 2011, it still faces a very challenging
environment and a battle to develop sustained, decent growth. Domestic demand
for manufactured goods continues to be handicapped by an appreciable squeeze on
consumers’ purchasing power, as well as by tighter public spending. Meanwhile,
muted economic activity in the Eurozone is limiting export orders, although
this is being countered by recently improved demand from Asia and the United
States. In addition, a current spike up in input costs is bad news for
manufacturers, as it squeezing their margins and, if sustained, will put
pressure on them to raise prices at a time when demand is still fragile.
Public Finances in February
The public finances data for February (out Wednesday) are
expected to show modest improvement compared to a year earlier.
Specifically, we forecast there to have been Public
Sector Net Borrowing Requirement (PSNBR) excluding financial interventions of
GBP7.5 billion in February, down from GBP8.8 billion in February 2011.
A modest year-on-year improvement in public finances is
expected in February as a result of the fiscal measures that increasingly
kicked in over the past year. In particular, spending cuts should now be having
more of an impact on public finance figures. Conversely, recent weakened
economic activity is likely to have limited the improvement, while tax revenues
were already being lifted in February 2011 by the VAT rate being increased from
17.5% to 20.0%.
Overall, the PSNBR excluding financial interventions
amounted to GBP3.5 billion in the first 10 months of fiscal 2011/12, which was
well down from GBP109.1 billion in the corresponding period in 2010/11. If the
overall performance of the first 10 months was replicated through the rest of
the fiscal year, the PSNBR would come in at GBP116.4 billion in 2011/12, which
is appreciably below the latest government forecast of GBP127 billion.
With the economy currently showing signs of improvement
and public finances undershooting over the first 10 months of fiscal 2011/12,
the chancellor looks like he will comfortably beat his current target of
cutting the PSNBR excluding financial interventions to GBP127 billion in
2011/12. It is vitally important for Mr. Osborne that the economy return to
growth in the first quarter of 2012 and then build on this if he is to succeed
in keeping the PSNBR to GBP120 billion in 2012/13.
Meanwhile, with Fitch in mid-March becoming the second
credit rating agency to put the UK’s prized AAA credit rating on negative
outlook, the chancellor is highly unlikely to significantly change the overall
fiscal stance in his budget on 21 March. The chancellor has been giving every
indication he will stick firmly to his fiscal consolidation plans, and Fitch’s
move reinforces the belief that he will be true to his word. Indeed, the
Treasury already commented that “this is a reminder of why it is essential
Britain sticks to its plans to deal with its debts."
Minutes of March Bank of England MPC Meeting
Wednesday sees the release of the minutes of the March
meeting of the Bank of England's Monetary Policy Committee (MPC), when the
committee made no further changes to policy after deciding to extend
Quantitative Easing (QE) by a further GBP50 billion at their February meeting.
This takes the stock of QE up to GBP325 billion. Meanwhile, the decision to
keep interest rates unchanged in March meant they have completed three years at
a record-low level of 0.50%.
There was never going to be any other outcome than
unchanged monetary policy at the March meeting of the MPC. Indeed, it will be a
major surprise if the Bank of England takes any policy action over the next
couple of months at least. With February’s GBP50-billion extension to
Quantitative Easing due to take through early May to enact, the Bank of England
is now firmly in wait-and-see mode while the MPC monitors whether the UK is
returning to sustainable growth and whether consumer price inflation is coming
down in line with expectations or is proving stickier than anticipated.
There are signs of an increasing divergence of opinion
within the MPC over just how quickly and how far consumer price inflation will
come down and whether the economy will need any further help in the form of
more QE. Some MPC members are clearly worried about the upside risks to
inflation coming from possible higher input costs (especially given oil’s
current strength) and extended low productivity. The more dovish MPC members
are concerned over the possibility of extended weak demand in a still-difficult
domestic and international environment. The pressures on consumers, tighter
credit conditions, extended tight fiscal policy, and the problems in the
Eurozone remain serious growth risks. The minutes of the March MPC meeting will
provide insight into how the balance of opinion is moving within the committee
over the relative upside and downside risks to the growth and consumer price
We currently believe that limited additional QE is more
likely than not. We anticipate that economic developments will warrant further
limited stimulative action despite recent signs of improvement. While we expect
the economy will return to growth in the first quarter and avoid recession, we
suspect that activity will be erratic and muted overall through the first half
of 2012 at least, and then only pick up gradually in the second half.
Meanwhile, we think consumer price inflation will trend down appreciably
further over the coming months, although clearly inflation may prove stickier
than hoped for due to the strength of oil prices. Even if this is the case,
underlying inflationary pressures still seem likely to be limited by extended
below-trend economic activity, significant excess capacity, and ongoing wage
moderation resulting from high and, likely, rising unemployment.
We lean towards the view that the Bank of England will do
GBP25 billion more QE in May, taking the total up to GBP350 billion, although
this could be delayed until August.
Meanwhile, we maintain the view that interest rates will
not rise until at least late 2013, and could very well stay put at 0.50% until
2014. There is clearly little interest within the Bank of England for taking
interest rates lower than 0.50%. Indeed, it is significant that even at the height
of the 2008/9 recession the Bank of England did not take interest rates below
0.50%, which reflected doubts within the MPC that even lower interest rates
would have a net beneficial impact.
Retail Sales in February
Retail sales volumes (out Friday) are expected to have
fallen back modestly in February after showing surprising vigour in January.
Specifically, we see retail sales volumes retreating 0.3%
month-on-month in February after rises of 0.9% in January and 0.6% in December.
This would see retail sales up 2.6% year-on-year in February.
It is evident that retail sales were lifted in December
and January by people looking to have a good Christmas after a tough year, and
also taking advantage of promotions in the run up to Christmas and heavy discounting
in the clearance sales.
Survey evidence from the British Retail Consortium (BRC)
and the Confederation of British Industry (CBI) pointed overall to muted retail
sales in February, although sales did not appear to collapse following
January’s surprisingly robust performance. In fact, the CBI’s distributive
trades survey showed that the balance of retailers reporting that sales were up
year-on-year rebounded to -2% in February after relapsing to a 34-month low of
-22% in January from a 7-month high of +9% in December (the January reading was
at odds with the actual increase of 0.9% month-on-month). Meanwhile, the BRC’s
retail sales monitor for February indicated that total retail sales values rose
2.3% year-on-year in February.
The suspicion is that consumers will be careful in their
spending over the next few months at least. Despite now falling back, consumer
price inflation (3.6% in January) is still running well ahead of annual
earnings growth (which actually slowed to 0.7% in January from 1.7% in
December), thereby continuing to squeeze purchasing power appreciably, while
consumers are also having to contend with high and rising unemployment,
elevated debt levels, and an extended fiscal squeeze. Additionally, consumer
confidence is still low compared to long-term norms despite recent improvement.
Hopefully a further marked retreat in consumer price inflation over the coming
months will increasingly ease the squeeze on consumers, although there is an
increasing risk that higher oil prices will limit the drop in inflation. Even
if consumer price inflation does fall back appreciably, unemployment is likely
to rise further, wage growth looks set to remain muted, tight fiscal policy
will continue to bite, and debt levels will still be high, so the overall
environment will likely remain tough for consumers.
20 Mar - Consumer Price Inflation, February
20 Mar - Consumer Price Inflation, February
20 Mar - Core Consumer Price Inflation (ex Food, Drink,
Tobacco), February (Year-on-Year): +2.4%
20 Mar - Retail Price Inflation, February
20 Mar - Retail Price Inflation, February (Year-on-Year):
20 Mar - Underlying Retail Price Inflation, February (Month-on-Month):
20 Mar - Underlying Retail Price Inflation, February
20 Mar - CBI Industrial Trends, Total Orders, March: -6
21 Mar - Public Sector Net Borrowing Requirement,
February (GBP/Bln): 7.5
21 Mar - Bank of England Monetary Policy Committee
interest rate vote split, March (Hike-Unchanged-Cut): 0-9-0
21 Mar - Bank of England Monetary Policy Committee
Quantitative Easing vote split, March (More-Unchanged-Reduced): 0-9-0
22 Mar - Retail Sales, February (Month-on-Month): -0.3%
22 Mar - Retail Sales, February (Year-on-Year): +2.6%