Preview of Major U.K. Economic Releases for Week Beginning 18 May

We expect the minutes to reveal that all nine MPC members were in favour of this move. The subsequently released Bank of England Quarterly Inflation Report for May revealed that the central bank believes that consumer price inflation is still likely to be below its 2.0% target on a two-year horizon, while the bank clearly also has concerns about the strength and sustainability of any economic recovery despite recent signs that the rate of economic contraction is easing substantially. Indeed, the Bank of England's growth and inflation forecasts contained in the Inflation Report, and accompanying comments by the bank's governor Mervyn King in the press conference, suggest that interest rates are set to stay down at 0.50% well into 2010, while further Quantitative Easing is very possible.

There is mounting evidence that manufacturing is well past its low point and the rate of contraction is easing appreciably, as the sector increasingly benefits from both the substantial de-stocking that has taken place and the boost to competitiveness stemming from the weak pound. We expect this to be reflected in the Confederation of British Industry's industrial trends survey for May (out on Wednesday). Specifically, we forecast the survey to reveal that the balance of manufacturers reporting that their overall orders were at normal levels rose to -47% in May from -57% in April from a 17-year low of -58% in March. This is likely to be helped by an improvement in the export orders sub-index. In addition, the balance of companies expecting output to rise over the next three months may well have risen appreciably further after improving to -32% in April from a 28-year low of -48% in March. Nevertheless, the survey is still likely to show that a significant balance of manufacturers are expecting to trim their prices over the next three months, as they face still muted demand and intense competition.

Inflation data for April (out Tuesday) should show a continuation of the recent marked downward trend, reflecting the heightened pressure on retailers to price competitively, companies' diminishing pricing power through the supply chain, lower utility prices, and favourable base effects as the impact of last year's sharp rises in oil prices increasingly drop out of the calculation. The British Retail Consortium's shop price deflator also indicated the upward pressure from food prices moderated in April. There will be some upward impact on inflation from the raising of excise duty on tobacco and alcohol in April's budget. In addition, oil prices have risen from the lows seen earlier this year, while sterling's weakness is having an upward impact.

On balance, we expect consumer price inflation to have fallen back to a 15-month low of 2.4% in April from 2.9% in March and a peak of 5.2% in September 2008. Core consumer price inflation is seen edging down to 1.6% in April from 1.7% in March. Most eye catchingly, the year-on-year decline in retail prices is seen widening to 1.0% in April from 0.4% in March, as is brought down by sharply lower mortgage interest rates. Meanwhile, annual underlying retail price inflation is expected to have fallen back to 1.7% in April from 2.2% in March.

Retail sales (out on Friday) are forecast to have grown by a relatively robust 0.7% month-on-month in April, pushing the year-on-year growth rate up to 2.7% from 1.5% in March. Survey evidence for April from both the British Retail Consortium and the Confederation of British Industry was substantially firmer and it is clear that retail sales were lifted markedly by this year's later Easter, as well as very good weather over the holiday period. On the positive side, sharply reduced mortgage payments and moderating inflation is boosting many people's purchasing power. Consumers remain under serious pressure from soaring unemployment and markedly slowing wage growth. Indeed, more and more people are facing pay freezes or wage cuts, while bonuses are being slashed or wiped out. On top of this, consumers are being hit by falling house prices, substantially reduced equity prices overall (despite the recent rally), and increased debt levels. Furthermore, credit conditions are still tight while many consumers are clearly keen to retrench, reflecting ongoing serious concerns about the economy and jobs.

Revised national accounts data for the first quarter of 2009 (out Friday) are expected to show that GDP fell by 1.8% quarter-on-quarter (q/q) and 4.0% year-on-year. This would represent a marginal upward revision from the preliminary estimate which showed GDP contracting by 1.9% quarter-on-quarter and 4.1% year-on-year. Latest data show that industrial production contracted by 5.3% quarter-on-quarter in the first quarter, which was modestly less than the 5.5% drop estimated in the preliminary GDP data. No details have been released so far on the expenditure side of GDP in the first quarter and we expect Friday's data to show that business investment (out Thursday) plunged and stocks were run down sharply further. It is also very likely that consumer spending contracted again despite retail sales rising by 0.9% quarter-on-quarter in the first quarter as the Bank of England's regional agents indicate that consumer spending on services declined markedly during the early months of the year and this is a significantly greater component of total consumption. Exports also highly likely fell in the first quarter, but this was probably countered by a decline in imports.

The public finances for April (out Thursday) will undoubtedly once again make dismal reading. Tax revenues are being decimated by sharply contracting economic activity, declining corporate profitability, soaring unemployment, markedly reduced bonus payments, last December's Value-Added Tax cut, and substantially weakened housing market activity and prices. Meanwhile, sharply higher unemployment is also resulting in higher benefit claims, thereby pushing up government expenditure. Consequently, we expect the Public Sector Net Borrowing Requirement (PSNBR) to have soared to £9.9 billion in April from £1.9 billion in April 2008.

By Howard Archer