Preview of Main U.K. Economic Releases and Events for the Week Commencing 8 February

The British Retail Consortium (BRC) retail sales monitor for January (out overnight on Monday/Tuesday) is expected to show a significant loss of momentum in sales compared with December. Not only are sales likely to have been limited significantly in January by the adverse weather conditions hitting footfall, but there are also indications in the already released Confederation of British Industry (CBI) distributive trades survey that less aggressive discounting by retailers in their clearance sales than a year ago had a depressing effect. Furthermore, the CBI survey suggested that value-added tax (VAT) rising from 15.0% to 17.5% at the beginning of January had hit sales of big-ticket items such as furniture and electricals.

The consensus is for the BRC to report that total retail sales rose 3.3% year-on-year (y/y) in January, while sales are expected to have increased just 0.5% on a like-for-like basis (which strips out the effect of additional floor space). This would be down appreciably from respective increases of 6.0% and 4.2% in December.

Hopefully, some of the losses in retail sales caused by the weather will be subsequently made up as consumers tend to delay purchases rather than cancel them altogether, when circumstances affect their ability to go to the shops.

Nevertheless, we suspect that the upside for consumer spending—and hence overall economic growth—will be limited in 2010 as households face still very challenging conditions, notably including high unemployment, low earnings growth, high debt levels, January's VAT hike, and the prospect of further fiscal tightening ahead that will very likely include further tax hikes. Meanwhile, still-serious concerns about the economic outlook and jobs are likely to maintain consumers' desire to improve their personal finances. There are also some concerns that interest rates could start to rise soon given the recent spike in inflation, although we think they are unlikely to rise before the fourth quarter of 2010 and should then increase only gradually. So, at least low mortgage rates should continue to support consumers' purchasing power.

Royal Institute of Chartered Surveyors Housing Market Survey for January

The housing market survey for January from the Royal Institute of Chartered Surveyors (RICS; overnight Monday/Tuesday) is expected to show that housing market activity is losing momentum, as was the case in the December survey. New buyer enquiries in December were reported to have risen at the slowest pace since January 2009, while the newly agreed sales balance slipped to +22% from +24% in November. Of particular interest, given that a property shortage has been supporting house prices in recent months, will be whether or not the number of properties coming onto the market is picking up due to vendors being attracted by the recent steady firming in prices. There has been some evidence of this in recent surveys—indeed, the RICS reported that the net balance of new instructions recorded its seventh consecutive positive reading in December and was at its equal highest level with November since May 2007. Even so, supply continued to lag behind demand, although the gap narrowed. The balance of surveyors reporting that house prices increased over the previous three months is expected to have eased further to +28% in January after dipping to +30% in December from a high of +35% in November.

Bank of England Quarterly Inflation Report for February

Following the decision of the Monetary Policy Committee (MPC) to bring quantitative easing to at least a temporary halt at its February meeting, attention will focus on the Bank of England's Quarterly Inflation Report for February to see how the central bank now sees the growth and inflation outlook. The report will contain the Bank of England's new GDP growth and inflation forecasts; we suspect that compared with November, the central bank will have cut its GDP growth forecasts for 2010 at least and raised its consumer price inflation forecasts. Certainly, GDP growth of 0.1% quarter-on-quarter in the fourth quarter of 2009 was significantly less than the Bank of England had anticipated while the spike in consumer price inflation to 2.9% in December was markedly more than expected.

Although the MPC brought quantitative easing to at least a temporary halt in February after spending a total of £200 billion, mainly on gilts, the statement accompanying the committee's decision indicated that it still had significant concerns about the strength and sustainability of the recovery. The statement also indicated that the Bank of England still expects consumer price inflation to fall below the 2.0% target level for a period. Consequently, the impression remains that any tightening of monetary policy still looks some considerable way off. Indeed, the Bank of England has left the door open for further quantitative easing "should the outlook warrant" it. The report will be closely scanned for further insights into the likely future course of monetary policy.

Trade Deficit in December

The total trade deficit (Wednesday) is expected to have narrowed to £2.7 billion in December, from £2.9 billion in November and a six-month high of £3.1 billion in October. This would be back in line with the average monthly deficit of £2.7 billion in the first 11 months of 2009. The visible trade deficit is forecasted to have narrowed to £6.5 billion in December from £6.8 billion in November and £7.1 billion in October. This would be just below the average monthly deficit of £6.7 billion in the first 11 months of 2009. It is hoped that the trade deficit will narrow over the coming months as exports increasingly benefit from the combination of sterling's weakness and improving domestic demand in key overseas markets. Nevertheless, the trade deficit has been lifted recently by substantially increased car imports resulting from demand being pushed up by the government's car scrappage scheme.

Industrial Production in December

We expect industrial production (Wednesday) to have grown 0.2% month-on-month (m/m) in December, following a rise of 0.4% in November. This would cause the y/y decline to narrow to 4.1% from 6.0% in November. Within this, manufacturing output is also forecasted to have grown 0.2% m/m in December, having been disappointingly only flat in November, with the y/y drop moderating to 3.1% from 5.4%. Overall industrial production was lifted in November by mining and quarrying output spiking 5.9% m/m as oil and gas extraction increased 7.2% m/m following the ending of maintenance work in the North Sea.

Latest manufacturing surveys from the purchasing managers, in particular, and the CBI have shown improvement overall, suggesting that manufacturers could now be increasingly benefiting from leaner stock levels, improved competitiveness in both domestic and foreign markets stemming from the weak pound, and firmer demand in key overseas markets, including the Eurozone and the United States. The January purchasing managers' survey also indicates that domestic demand is picking up. Nevertheless, the manufacturing sector is still far from racing ahead and serious doubts remain about the strength of demand for manufactured goods over the medium term, particularly once stimulative measures start being withdrawn.

By Howard Archer

9 Feb - British Retail Consortium Monitor Total Sales, January (Year-on-Year): not forecast
9 Feb - British Retail Consortium Monitor Like-for-Like Sales, January (Year-on-Year): not forecast
9 Feb - RICS House Price Balance, January: +28
9 Feb - Visible Trade Balance, December (GBP/Month): -6.5
9 Feb - Non-EU Visible Trade Balance, December (GBP/Month): -3.1
9 Feb - Total Trade Balance, December (GBP/Month): -2.7
10 Feb - Industrial Production, December (Month-on-Month): +0.2%
10 Feb - Industrial Production, December (Year-on-Year): -4.1%
10 Feb - Manufacturing Output, December (Month-on-Month): +0.2%
10 Feb - Manufacturing Output, December (Year-on-Year): -3.1%