Inflation, Unemployment, Retail Sales, and BoE Minutes Feature in UK Economic Releases for the Week Commencing 16 April
With uncertainty surrounding the Bank of England (BoE)’s plans for any more quantitative easing (QE), the April meeting minutes of the bank’s Monetary Policy Committee (MPC) will be closely scanned for more concern about the upside risks to consumer price inflation or the downside risks to growth over the coming months. Consumer price inflation should have been stable in March, retail sales are seen picking up reasonably well in March after February’s sharp relapse, and labor market data are expected to show that unemployment is currently rising at a much reduced rate.
Consumer Price Inflation in March
Data out Tuesday are expected to show consumer price inflation stabilized at 3.4% in March after falling to this level in February from 3.6% in January, 4.2% in December, and a three-year high of 5.2% in September 2011. This is the lowest consumer price inflation level since November 2010 but still appreciably above the BoE’s 2.0% target rate. Core consumer price inflation is seen edging down to 2.3% in March after dropping to 2.4% in February from 2.6% in January and 3.4% in October 2011.
Inflation has come down appreciably in recent months because of favorable base effects reflecting the waning impact of the value-added tax rise from 17.5% to 20.0% at the start of 2011 and the fact that energy, food, and commodity prices were rising sharply in late 2010 and the early months of 2011. In addition, a number of utility providers trimmed their energy tariffs in February.
Nevertheless, recent elevated oil prices caused petrol prices to reach a record high in March, and this also contributed to an apparent move up in food prices again. Significantly, the British Retail Consortium (BRC) reported the year-on-year (y/y) increase in its shop-price deflator climbed to 1.5% in March after dipping to a 23-month low of 1.2% in February. This rise was due to the y/y increase in food prices mounting to 5.2% in March from 4.2% in February. In contrast, nonfood shop prices fell 0.9% y/y in March, which was the sharpest drop for 28 months and pointed to still-appreciable discounts and promotions being offered by retailers. The BRC also pointed out that the money off total bill vouchers that are currently being offered by some supermarkets and retailers is not reflected in shelf prices.
While inflation should trend lower over the coming months, the very real danger is that it will prove significantly stickier than had been hoped for because of persistently high oil prices. It had seemed very possible that consumer price inflation would be down to the BoE’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. Nevertheless, this is currently looking increasingly questionable given current high oil price levels and the possibility that they could go higher still.
If consumer price inflation does prove to be sticky over the coming months, it 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 BoE to justify undertaking more QE to support activity if the economy continues to struggle.
Minutes of April BoE MPC Meeting
Wednesday sees the release of the minutes of the April meeting of the Bank of England's MPC, when for a second month running the committee made no further changes to policy after deciding to extend QE by a further GBP50 billion at its February meeting. This decision takes the stock of QE up to GBP325 billion. Meanwhile, interest rates were kept down at 0.50% at the April meeting where they have been since March 2009.
The minutes of the April MPC meeting will be scanned, as always, for indications about how the committee regards the latest developments on both the growth and the inflation fronts, how it sees growth and inflation most likely developing over the coming months, and where it considers the balance of risks to be.
There will be particularly keen interest in trying to decipher the April MPC meeting minutes as May is potentially a pivotal month for monetary policy. February’s latest extension to the QE program will have finished by then, and the MPC will also have the new BoE GDP growth and consumer price inflation projections available that will be prepared for the May edition of the BoE’s Quarterly Inflation Report. The MPC will also have the first estimate of UK GDP in the first quarter of 2012.
If the Bank of England fails to extend QE at the May MPC meeting, it will mark at least a temporary end to the program that was revived in October 2011 and would be a sign that the committee believes that the UK economy does not need any more emergency help for now at least!
The current indications are that there are significant differences of opinion within the MPC over the outlooks for growth and inflation, and the need for further stimulative action. At the March MPC meeting, both Adam Posen and David Miles favored an immediate additional GBP25 billion of QE. Nevertheless, none of the other seven MPC members favored such a move and latest comments by two of them—Martin Weale and Spencer Dale—suggest they currently believe there will not be a need for further QE.
We have a sneaking suspicion that the BoE is not quite yet done on the QE front. We believe the economy is likely to stutter over the coming months in the face of still-serious domestic and international headwinds and that a majority of MPC members may feel that a final small helping hand is in order. The sharp drop in manufacturing output in February is a sharp reminder that the economy still faces a tough battle to generate decent sustainable growth.
While consumer price inflation may prove stickier than previously expected in the near term because of elevated oil prices, it should still eventually fall appreciably further as underlying price pressures are limited by extended below-trend economic activity, significant excess capacity, and ongoing wage moderation resulting from high and, likely, rising unemployment.
Specifically, we lean toward the view that the BoE will enact a final, smaller QE dose of GBP25 billion, taking the total up to GBP350 billion. We now think it is more likely to be delayed until the third quarter rather than occur in May, given the overall improved economic news for March. 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.
Unemployment in March
Labor market data Wednesday are likely to show further modest overall rises in unemployment, although the increases are likely to be limited compared with late 2011. In fact, the number of jobless on the International Labour Organization (ILO) measure is seen essentially flat in the three months to February, to stand around 2.685 million. Even so, this would keep the number of jobless on this measure at a 17-year high and would see the ILO unemployment rate remain at 8.4%. ILO data are also likely to show employment rose by around 10,000 in the three months to February to 29.130 million. This rise is likely to have been inflated by increased part-time jobs, and it is very possible that full-time employment was down modestly. Employment is down from a peak of 29.279 million in the three months to May 2011, which was the highest level since end-2008.
Meanwhile, claimant-count unemployment is forecast to have risen by a relatively modest 7,000 in March, which would be little changed from increases of 7,200 in February and 7,000 in January. Nevertheless, this would be a 13th successive increase and take the number of claimant-count unemployed to a 29-month high of 1.6189 million in March from a 24-month low of 1.4498 million in February 2011. Claimant-count unemployment rose much more sharply earlier in 2011 because of changes made to the benefits system, as well as due to muted economic activity. The claimant-count unemployment rate is expected to have edged up to 5.1% in March, having stood at 5.0% since last September. This is up from a low of 4.5% in the five months through to March 2011.
While recent increases in unemployment have been significantly reduced overall, we suspect that unemployment is still headed higher for some months to come as economic activity remains limited overall, business confidence is fragile, and public-sector jobs are pared. While the economy likely achieved limited growth in the first quarter of 2012 after GDP contracted 0.3% quarter-on-quarter (q/q) in the fourth quarter of 2011, we suspect activity will remain relatively soft overall and prone to relapses for some time to come. As a result, business confidence is likely to remain fragile, which will limit employment in the private sector as substantial job cuts occur in the public sector as part of the government’s public spending cuts.
Furthermore, current high oil prices are increasing the pressure on companies to limit their total costs by containing their wage costs, be it through holding down pay or keeping their labor forces as tight as possible.
We currently expect the number of jobless on the ILO measure to reach a peak close to 2.85 million in late 2012/early 2013, which would see the unemployment rate climb to 8.8%. This marks a modest downward revision on our previous forecast that unemployment would reach 2.90 million and the unemployment rate would hit 9.0%. Much will obviously depend on whether the economy can build on a likely return to growth in the first quarter of 2012.
Average Earnings in February
Underlying average earnings growth (Wednesday) is expected to have remained muted in February and substantially below past norms. This is the consequence of relatively high and rising unemployment, workers' job insecurity, and a pressing need for many companies to limit their costs in a very challenging environment. The recent rise in oil prices is a further reason for companies to try to limit their overall costs by containing their wage costs.
Specifically, underlying average weekly earnings growth (regular pay excluding bonus payments) is seen moderating to 1.5% in the three months to February from 1.7% in the three months to January (which matched the 2011 low of 1.7% seen in the three months to September). Annual average weekly earnings (total pay) growth is expected to have fallen to just 1.3% in the three months to February from 1.4% in the three months to January and 1.9% in the three months to December because of 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 BoE's 2.0% consumer price inflation target. They are also still well below current inflation levels, so consumers’ purchasing power is still being substantially squeezed even though consumer price inflation is now retreating (it was down to 3.4% in February from a three-year high of 5.2% in September 2011).
Retail Sales in March
Retail sales volumes (Friday) are expected to have seen an appreciable bounce in March after suffering a surprisingly sharp relapse in February. Specifically, we expect retail sales volumes to have increased 0.7% month-on-month (m/m) in March, which would result in y/y growth of 1.7%. Retail sales volumes fell 0.8% m/m in February after rising 0.3% in January and 0.7% in December. How retail sales fared in March will give an indication as to whether February’s sharp drop in sales volumes was influenced markedly by consumers taking a breather after decent, discount-fueled spending over December and early January or whether it was evidence of a more fundamental consumer reluctance to spend in the face of still serious headwinds. If March retail sales do see significant growth, it will significantly boost the likelihood that overall consumer spending was positive in the first quarter and helped the overall economy return to growth after GDP contracted 0.3% q/q in the fourth quarter of 2011.
Survey evidence from the BRC and the Confederation of British Industry (CBI) pointed overall to improved retail sales in March, helped by the warm weather. It is also likely overall retail sales were lifted by the panic buying of petrol that occurred late in the month. The BRC’s retail sales monitor indicated that total retail sales values rose 3.6% y/y in March. Meanwhile, the CBI’s distributive trades survey showed that the balance of retailers reporting that sales were up y/y climbed to 0% in March from -2% in February and a 34-month low of -22% in January. Even so, this was still below the overall average of +3% for 2011 and substantially below the +42% average seen in the second half of 2010.
Future developments in consumer spending are key to the economy’s ability to build on an apparent return to growth in the first quarter. The concern is that consumers are still facing challenging conditions overall that threaten to limit their spending in the near term at least.
On the positive side, consumer price inflation has fallen appreciably since peaking last September (from a three-year high of 5.2% to 3.4% in February), and unemployment is rising at a reduced rate overall.
Nevertheless, consumers’ purchasing power is still being squeezed appreciably—as despite receding consumer price inflation is currently still running well ahead of earnings growth. Consumer price inflation of 3.4% in February compared with annual average earnings growth of just 0.7% in January (and 1.4% in the three months to January). On top of this, unemployment is high and still rising, debt levels are elevated, and consumers still have significant concerns over the outlook. Consumer confidence weakened in March, having been modestly firmer overall during the first two months of the year.
Hopefully, an ongoing retreat in inflation over the coming months will further dilute the squeeze on consumers, although worryingly inflation may well be stickier in the near term because of high oil prices. Even if consumer price inflation does fall appreciably, unemployment is likely to rise further, wage growth looks set to remain muted, and debt levels will still be high, so the overall environment will likely still be tough for consumers.
By Howard Archer
17 Apr - Consumer Price Inflation, March (Month-on-Month): +0.3%
17 Apr - Consumer Price Inflation, March (Year-on-Year): +3.4%
17 Apr - Core Consumer Price Inflation (ex Food, Drink, Tobacco), March (Year-on-Year): +2.3%
17 Apr - Retail Price Inflation, March (Month-on-Month): +0.4%
17 Apr - Retail Price Inflation, March (Year-on-Year): +3.5%
17 Apr - Underlying Retail Price Inflation, March (Month-on-Month): +0.4%
17 Apr - Underlying Retail Price Inflation, March (Year-on-Year): +3.7%
18 Apr - Bank of England Monetary Policy Committee interest-rate vote split, April (Hike-Unchanged-Cut): 0-9-0
18 Apr - Bank of England Monetary Policy Committee Quantitative Easing vote split, April (More-Unchanged-Reduced): 2-7-0
18 Apr - Claimant-Count Unemployment Rate, March (%): 5.1%
18 Apr - Claimant-Count Unemployment Change, March (000s): +7
18 Apr - International Labour Organization Unemployment Rate, February (%): 8.4%
18 Apr - Average Weekly Earnings - total pay, February (3-Month/Year): +1.3%
18 Apr - Average Weekly Earnings - regular pay excluding bonus, February (3-Month/Year): +1.5%
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