Preview of Major U.K. Economic Releases for the Week Beginning 11 May

There are growing signs that the manufacturing sector has passed its worst point, helped by both the substantial destocking that has taken place and the boost to competitiveness stemming from the weak pound. Certainly, the survey evidence for April from both the purchasing managers (especially) and the Confederation of British Industry (CBI) pointed to the sector's rate of contraction moderating. Nevertheless, data out Tuesday are expected to show that manufacturing output fell by 0.9% month-on-month (m/m) in March, which would mark a 13th successive monthly decline and leave it down by 14.0% year-on-year (y/y). Industrial production is also seen falling by 0.9% in March, resulting in a y/y decline of 12.8%.

April's housing market survey from the Royal Institute of Chartered Surveyors (overnight Monday/Tuesday) should show that the balance of surveyors reporting that house prices increased over the previous three months improved modestly to -70.0% in April, from -73.1% in March and -78.1% in February. Nevertheless, this would mark the 21st successive negative balance. The survey is likely to reveal that buyer enquiries continue to pick up and that completed sales per surveyor rose for a second month running in April after rising in March for the first time since late 2007.

There are increasing signs that the housing market activity has passed its low point, helped by the substantial fall in house prices from their 2007 peak levels and markedly reduced mortgage rates. Nevertheless, housing market activity is still very low by long-term norms, and any pickup in activity over the coming months is likely to be gradual and fitful, given still-poor economic fundamentals and tight credit conditions. Consequently, we believe that house prices will fall significantly further, although we do expect the rate of decline to gradually moderate over the coming months. There is also likely to be increasing volatility around this trend. Specifically, we expect house prices to fall by around another 15% from their current levels to trough around mid-2010. This would leave them some 35% below the peak levels seen around August/September 2007. The consensus is for the Department for Communities and Local Government's house price index for March (Tuesday) to show that the y/y fall in house prices widened to 12.9% in March, from 12.3% in February.

The British Retail Consortium (BRC) retail sales monitor for April (overnight on Monday/Tuesday) is expected to show significant improvement compared with March, as sales were lifted by this year's later Easter (it occurred in April in 2009 and in March in 2008). The consensus is for total sales to have risen by 1.5% y/y in April, which would be up from an increase of 0.6% in March. On a like-for-like basis (which strips out the effect of additional floor space), retail sales are seen edging up by 0.1% y/y in April after a fall of 1.2% y/y in March. The CBI has already released its distributive trades survey for April, which showed a balance of +3% of retailers reporting that sales were up y/y. This was the first positive balance in 13 months and compared with balances of -44% in March and -25% in February. However, it is apparent that the sharp rise in April's balance was significantly boosted by this year's later Easter, just as March's balance was likely to have been distorted downwards by this factor.

On the positive side, sharply reduced mortgage payments and lower inflation are boosting the purchasing power of those people with jobs. The problem remains that consumers are currently under serious pressure from soaring unemployment and markedly slowing wage growth, though. Indeed, more and more people are facing pay freezes or wage cuts, while bonuses are being reduced substantially. On top of this, consumers are being hit by falling house prices, substantially reduced equity prices overall, and increased debt levels. Furthermore, credit conditions are still tight while many consumers are clearly keen to retrench, reflecting their deep concerns about the economy and jobs. This is evident in the sharp rise in the household savings ratio to 4.8% in the fourth quarter of 2008 from 1.7% in the third quarter.

Indeed, data out Wednesday are expected to reveal another sharp rise in unemployment and further downward pressure on earnings. Claimant-count unemployment is forecasted to have climbed by 80,000 in April, which would take it above the 1.5-million level at 1.544 million. This would be up from an increase of 73,700 in March, but well down on the record 136,600 jump seen in February. The claimant-count unemployment rate is seen rising to 4.8% in April, from 4.5% in March, taking it to its highest level since November 1997. Meanwhile, unemployment on the International Labour Organization (ILO) measure is seen rising by around 200,000 in the three months to March compared with the three months to December. This would take unemployment on this measure to 2.170 million, giving an unemployment rate of 7.0%. Despite some recent signs that the rate of economic decline is moderating, unemployment is a lagging indicator, and the extended deep economic contraction seen since mid-2008 is continuing to hit the jobs market hard.

Meanwhile, average earnings should have fallen by 1.5% y/y in the three months to March as they were dragged down by sharply reduced bonus payments. Nevertheless, underlying average earnings are also under serious downward pressure from sharply rising unemployment, heightened job insecurity, negative retail price inflation, and the need for companies to contain their costs in the face of markedly reduced demand. Consequently, annual underlying average earnings growth (excluding bonus payments) is seen falling to 3.0% in the three months to March, which would be the lowest level since the series began in 2001. These rates compare with the 4.5% level that the Bank of England considers broadly consistent with its 2.0% consumer price inflation target.

The trade deficit (Tuesday) is expected to have narrowed in March. There are some signs that the sharp depreciation of sterling is providing increased support to U.K. exporters, although the upside for exports continues to be limited by sharply weakened domestic demand in key foreign markets—notably, the Eurozone and the United States. Meanwhile, imports are being limited by the marked decline in U.K. domestic demand.

By Howard Archer

12 May - British Retail Consortium Monitor Total Sales, April (Year-on-Year): not forecast

12 May - British Retail Consortium Monitor Like-for-Like Sales, April (Year-on-Year): not forecast

12 May - RICS House Price Balance, April: -70%

12 May - March DCLG House Prices (Year-on-Year): not forecast

12 May - Industrial Production, March (Month-on-Month): -0.9%

12 May - Industrial Production, March (Year-on-Year): -12.8%

12 May - Manufacturing Output, March (Month-on-Month): -0.9%

12 May - Manufacturing Output, March (Year-on-Year): -14.0%

12 May - Visible Trade Balance, March (GBP/Mil.): -7.2

12 May - Non-EU Visible Trade Balance, March (GBP/Mil.): -4.3

12 May - Total Trade Balance, March (GBP/Mil.): -2.9

13 May - Claimant-Count Unemployment Rate, April (%): 4.7%

13 May - Claimant-Count Unemployment Change, April (000s): +80K

13 May - International Labour Organization Unemployment Rate, March (%): 7.0%

13 May - Average Earnings including bonus, March (3-Month/Year): -1.5%