Preview of Main UK Economic Releases for the Week of 6 August
The Bank of England’s Quarterly Inflation Report for August is likely to open the door wide to further stimulative action by the central bank, most likely in the fourth quarter. If the British Retail Consortium’s retail sales monitor for July is soft, it will be another serious dent to hopes that the economy can achieve at least a modest bounce in the third quarter after GDP contracted by 0.7% quarter-on-quarter in the second quarter. Meanwhile, industrial production is likely to have been dismal in June as an already-struggling sector was hit hard by the two days’ public holiday.
British Retail Consortium Retail Sales Monitor for July
The British Retail Consortium (BRC) retail sales monitor (out overnight on Monday/Tuesday) is expected to show relatively muted retail sales in July. The likelihood is that poor weather continued to limit retail sales in July, particularly by holding down demand for summer clothing and outdoor goods. This was certainly the indication from the Confederation of British Industry (CBI)’s distributive trades survey for July, which was softer than hoped for. However, the BRC survey comes out appreciably later than the CBI survey so it may have been helped more by people stepping up purchases of Olympics merchandise in late July and buying more food and drink to get ready to enjoy the Games.
Retailers will be desperately hoping that the Olympics will provide a significant, if temporary, lift to their sales. They will also be praying for an extended period of improved weather as it would support demand for summer clothing and outdoor goods which has been very weak so far this summer. Indeed, retailers generally have had to engage in early and heavy discounting of summer clothes in particular to shift stock.
Retail sales were poor overall in the second quarter as volumes fell by 0.7% quarter-on-quarter (q/q). Sales volumes could only edge up 0.1% month-on-month in June as they apparently failed to receive a hoped-for significant boost from the Queen’s Diamond Jubilee celebrations. Retail sales were also handicapped in June by the very wet weather dampening sales of summer clothing and outdoor products.
There are some recent hopeful developments for retailers. In particular, the squeeze on consumers’ purchasing power has eased appreciably recently with inflation coming down to a 31-month low of 2.4% in June, having been as high as 5.2% last September. Meanwhile, latest data show that employment rose by 181,000 in the three months to May.
It seems unrealistic to expect a sustained major pick-up in consumer spending in the near term at least. Consumer confidence is still very low compared to long-term norms, and the worrying economic situation and outlook is likely to maintain affair degree of caution in spending. Meanwhile consumer price inflation of 2.4% in June was still above annual earnings growth of 1.8% in May, and tighter fiscal policy is also adding to the squeeze on some consumers. Furthermore, oil prices have recently moved up appreciably from their June 18-month lows so this could put some renewed upward pressure on inflation. In addition, unemployment is still high, with many of the recent job gains being in low-paid or part-time work, or due to a rise in self-employment. On top there is a need for many consumers to deleverage.
Industrial Production in June
There is no doubt that the industrial production figures for June (Tuesday) will be truly dire given that there were two day’s public holiday that month while underlying activity also seems to have been very weak. The only question is just how dire will the industrial production figures for June be? When estimating that GDP contracted by 0.7% q/q in the second quarter, the Office for National Statistics reckoned that industrial production contracted by 1.3% q/q. Based on the actual data for May and April, this implies that industrial production nosedived by around 4.5% month-on-month (m/m) in June.
We find it hard to believe that industrial production fell by quite this amount especially as it only rose by 1.1% in May when there was one extra working day due to the late-May public holiday being moved into June. So we have penciled in a 3.5% m/m drop in industrial production in June with manufacturing output down by 3.8% m/m. If this proved to be the case, it would be liable to result in an eventual modest trimming of the reported 0.7% q/q drop in GDP in the second quarter.
Whatever the actual size of the drop in industrial production in June, there is little doubt that the manufacturing sector is finding life very difficult at the moment, as was highlighted by the dire July purchasing managers’ survey. Domestic demand for manufactured goods is handicapped by current muted investment intentions, still serious headwinds facing consumers and tightening public spending. Furthermore, the current uncertain and worrying economic environment is leading to some 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 hit to their competitiveness from the pound recently trading at a 44-month high against the euro. And it is not just weakened demand from the Eurozone that is a concern for UK manufacturers. The manufacturing purchasing managers’ survey for June reported that while the Eurozone was the major drag on export orders, there were also reports of reduced business from Asia.
At least though, manufacturers are helped by the marked overall falling back in oil prices from their March highs reducing the squeeze on their margins and giving them more scope to price competitively. However, even this may not last with Brent oil prices now back up to trade around USD105/barrel after dipping to an 18-month low under USD90/barrel in June.
Bank of England Quarterly Inflation Report for August
The Bank of England’s Quarterly Inflation Report for August (Wednesday) is likely to make for grim reading and leave the door very much open for further stimulative action by the bank. The only crumb of comfort for the Bank of England is that at least it can revise down its consumer price inflation projections as well as its GDP growth forecasts. In recent times, the Bank of England has consistently had the double whammy of having to revise down its GDP growth (or lack of growth) forecasts and revise up its consumer price inflation projections.
The Bank of England had forecast back in May that GDP would be up 0.2% year-on-year (y/y) in the second quarter of 2012. In fact, the preliminary estimate from the Office for National Statistics shows a drop of 0.8% y/y. While second quarter GDP contraction of 0.7% q/q was partly the consequence of the extra day’s public holiday due to the Queen’s Diamond Jubilee and very wet weather hitting retail sales and construction activity, it still looks like the underlying economy is appreciably softer than expected. While the Bank of England will undoubtedly indicate that the economy is not in quite as bad a shape as the second quarter GDP performance indicates and will also pin some of the blame on events in the Eurozone, it will likely acknowledge that the economy has taken a significant turn for the worse and currently faces a worrying and uncertain outlook.
The Bank of England also forecast in May that consumer price inflation would average 3.2% in the second quarter; in fact, it averaged 2.7% and was down to 2.4% in June. It therefore looks certain that consumer price inflation will be appreciably below the bank’s forecast of 2.9% at the end of 2012, and will also be softer than projected in the early months of 2013. However, the Bank of England is unlikely to markedly lower its forecast inflation rate of 1.6% in mid-2014 and the second half of 2014.
We believe that a further GBP50 billion dosage of quantitative easing is highly likely which would take the stock up to GBP425 billion. For now at least we believe that the MPC will not act again wait until July’s GBP50-billion extension runs out in November, especially as the Funding for Lending Scheme (which kicked off on 1 August) will hopefully increasingly take effect.
We certainly would not rule out a future trimming of interest rates from 0.50% to 0.25%, but we believe it is more likely that they will stay at 0.50% through until at least late 2014. We suspect that the MPC will continue to have significant doubts that lower interest rates would have an overall beneficial impact. The MPC is concerned that even lower interest rates would hit banks’ profit margins and constrain their ability to lend. There is also concern that the functioning of money markets would become impaired. In addition, the Bank of England doubts that taking interest rates below 0.50% would significantly help many borrowers, although it acknowledges that the number of people with mortgages contractually linked to Bank rate has increased since early 2009.
Trade Deficit in June
The total trade deficit (Thursday) is expected to have widened to GBP3.1 billion in June after narrowing to GBP2.7 billion in May from GBP4.1 billion in April. In fact, the trade data have been pretty volatile recently but they have been disappointing overall. On current data, a deficit of GBP3.1 billion in June would actually give an overall total trade deficit of GBP9.9 billion in the second quarter, which would be up from GBP7.8 billion in the first quarter of 2012 and GBP5.6 billion in the fourth quarter of 2011. Within this, the traded goods deficit is seen widening to GBP8.7 billion in June after narrowing to GBP8.4 billion in May from GBP9.7 billion in April.
There was a significant jump in exports in May but this actually less than offset the drop in April. Meanwhile, UK imports were muted overall in April and May which points to soft domestic demand.
The UK has been looking to improved net trade to boost overall economic activity. However, 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. Exports of goods and services disappointingly fell 1.7% q/q in the first quarter in real terms, while imports were down by 0.3%. It also looks likely that net trade was negative in the second quarter and contributed to the 0.7% q/q contraction in GDP.
Despite the rebound in exports in May, significant doubts remain as to whether the UK can achieve a sustained improved export performance any time soon which helps the economy become more balanced. 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 trading at a near three-year high on a trade-weighted basis in July when it hit a 44-month high against the euro.
Worryingly, latest survey evidence on foreign orders is softer. In particular, the export index of the latest purchasing managers’ survey for the manufacturing sector showed foreign orders contracting for the fifth time in six months in July, and at the fastest rate since March 2009. While demand from the Eurozone was particularly weak in July, some manufacturers also reported reduced orders from Asia. Meanwhile, the export orders balance of the CBI industrial trends retreated to -9% in July after spiking to a four-month high of -4% in June from a four-month low of -12% in May. Even so, the export orders balance was clearly above the long-term average of -21%.
Producer Prices in July
Producer price data (Friday) are forecast to show that output prices rose by a modest 0.2% m/m in July after falling 0.4% in June. This would see the y/y increase retreat to a 33-month low of 2.2% in July from 2.3% in June, 2.9% in July and a near-three year high of 6.3% in September 2011. Core output prices are forecast to have edged up just 0.1% m/m in June after a drop of 0.2% in June. This would cause the y/y increase to fall back to a 32-month low of 1.7% in July from 2.0% in June, 2.3% in May and a peak of 3.7 % in September 2011.
Meanwhile, the consensus forecast is for producer input prices to have moved back up by 1.7% m/m in July after sharp drops in each of the previous three months including a decline of 2.2% in June. A firming in oil prices from 18-month lows in June and higher grain prices are likely to have pushed up producer input prices in July. Even so, producer input prices would still be down 1.1% y/y in July. This contrasts with a peak increase in producer input prices of 18.5% y/y in July 2011.
Recent markedly lower input prices have eased the pressure on manufacturers’ margins and reduced pressure on them to raise their prices. In fact, the moderation in input prices gives manufacturers’ increased scope to trim prices to win business. Meanwhile, extended and appreciable contraction in manufacturing activity means that more companies feel the need to price competitively to try and gain, or even retain, business.
House Prices in July
The Halifax lender is forecast to report during the week that house prices fell 0.5% m/m in July, which would leave them down by 0.6% y/y in the three months to July. The Halifax house price index has been pretty volatile in recent months and it showed a 1.0% m/m increase in June but prices still down by 0.3% q/q in the second quarter. The Nationwide lender has already reported that house prices fell 0.7% m/m in July after a drop of 0.6% in June. House prices were down 2.6% y/y in July on the Nationwide measure
We believe that house prices are headed lower over the rest of 2012 and very possibly beyond in the face of limited activity, low and fragile consumer confidence, muted earnings growth and relatively high unemployment. We expect house prices to end up losing at least 3% from current levels. In fact with the economy slumping in the second quarter and the outlook highly uncertain as the Eurozone crisis grinds on, we believe that there is a mounting danger that house prices could fall by appreciably more than 3% from current levels.
Housing market activity is persistently low compared to 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 launched by the Bank of England on 1 August, this is unlikely to be a major factor in the near term at least.
It is possible that 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.
By Howard Archer
7 Aug - British Retail Consortium Monitor Total Sales, June (Year-on-Year): not forecast
7 Aug - British Retail Consortium Monitor Like-for-Like Sales, June (Year-on-Year): not forecast
7 Aug - Industrial Production, June (Month-on-Month): -3.5%
7 Aug - Industrial Production, June (Year-on-Year): -5.0%
7 Aug - Manufacturing Output, June (Month-on-Month): -3.8%
7 Aug - Manufacturing Output, June (Year-on-Year): -5.0%
9 Aug - Non-EU Visible Trade Balance, June (GBP/Month): -4.1
9 Aug - Visible Trade Balance, June (GBP/Month): -8.7
9 Aug - Total Trade Balance, June (GBP/Month): -3.1
10 Aug - Producer Price Input Inflation, July (Month-on-Month): not forecast
10 Aug - Producer Price Input Inflation, July (Year-on-Year): not forecast
10 Aug - Producer Price Output Inflation, July (Month-on-Month): +0.2%
10 Aug - Producer Price Output Inflation, July (Year-on-Year): +2.2%
10 Aug - Core Producer Price Output Inflation (ex Food, Tobacco etc.) July (Month-on-Month): +0.1%
10 Aug - Core Producer Price Output Inflation (ex Food, Tobacco etc.) July (Month-on-Month): +1.7%
During Week - Halifax House Prices, July (Month-on-Month): -0.5%
During Week - Halifax House Prices, July (Year-on-Year): -0.6%
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