Inflation, Unemployment, Retail Sales, and Bank of England Minutes Headline the UK Economic Indicators for the Week Commencing 13 August
Labour market data are expected to show ongoing resilience, despite otherwise weak news on the economy. It remains difficult to reconcile the resilience of the labour market with the economic contraction experienced since the third quarter of 2011: either the economy is doing appreciably better than the national accounts data show, the labour market is doing significantly worse than the hard data indicate, or productivity has genuinely weakened sharply.
Consumer Price Inflation in July
Data out on Tuesday are expected to show that consumer price inflation was stable at 2.4% in July, after dipping sharply to this level in June from 2.8% in May, 3.0% in April, and 3.5% in March. This is the lowest level since November 2009 and down from a three-year high of 5.2% in September 2011. Consumer price inflation is also now within reaching distance of the Bank of England’s 2.0% target rate.
Inflation is expected to have been limited in July by ongoing marked discounting by retailers while annual food price inflation may well have dipped further. However, this is likely to have been countered by a move back up in petrol prices. The British Retail Consortium (BRC) has reported that the year-on-year (y/y) increase in its shop price deflator moderated to 1.0% in July from 1.1% in June and 1.5% in May, primarily due to the annual increase in food prices falling back to a two-year low of 3.1% in July from 3.5% in June and 4.3% in May. The BRC data also showed that there was a 0.3% y/y drop in non-food prices in July, the same as in June.
With consumers still under pressure on a number of fronts, many retailers have engaged in heavy discounting in the summer sales to try and shift stock. This has been particularly true for summer clothing and some outdoor products as the very wet weather has further dampened sales. There was also marked discounting in the summer sales in 2011. Consequently, core consumer price inflation (which excludes energy, food, alcohol, and tobacco prices) is stable at 2.1% in July. This is the equal lowest level since November 2009 and down from 2.2% in May and 2.5% in March.
However, some upward pressure on inflation in July is expected to have come from a move back up in petrol prices after recent falls. Significantly, oil prices have firmed appreciably after dipping to an 18-month low in early June. Consequently, Brent oil averaged USD102.6/barrel in July after falling to an average of USD95.1/barrel in June from a peak average of USD125.3/barrel in March.
Consumer price inflation should trend lower over the coming months, although the scope for further falls in the near term may be limited by a further rise in oil prices with Brent oil currently trading back up around USD113/barrel. In addition, food prices could well come under increasing pressure from rising grain prices.
Crucially, though, underlying price pressures are expected to be held down over the coming months by appreciable excess capacity, extended muted economic activity, and ongoing wage moderation amid substantial labour-market slack. Inflation is seen very close to the Bank of England's 2.0% target level by the end of 2012 before dipping further to be just below 2.0% during much of 2013.
Unemployment in July
Labour market data on Wednesday will be scanned for any signs that the resilience in the labour market is starting to wane in reaction to the economy’s three successive quarters of contraction. Nevertheless, it is possible that there was a temporary boost to employment in July from jobs related to the staging of the Olympic Games.
It remains very hard to reconcile the resilience of the labour market with the contraction of the economy since the third quarter of 2011. The implication is that either the economy is doing appreciably better than the national accounts data show, the labour market is doing significantly worse than the hard data show, or productivity has genuinely weakened sharply. The jury is currently very much out as to what the actual answer is, but in the spirit of being a typical economist, the temptation is to go for it being a combination of all three! In fact, recent upward revisions to construction output and industrial production data already indicate that the contraction in second-quarter GDP was less than the 0.7% quarter-on-quarter drop shown, although the decline is still way out of line with the jobs data.
Claimant-count unemployment is forecast to have risen 7,500 in July, after increases of 6,100 in June and 6,900 in May. Claimant-count unemployment had earlier dipped 12,800 in April and 5,400 in March (which had been the first declines since October 2010). A rise of 7,500 in July would take claimant-count unemployment up to a 33-month high of 1.6117 million after it retreated to 1.5912 million in April from a previous high of 1.6094 million in February. While the recent renewed rises in claimant-count unemployment could be a sign that the labour market is starting to turn down, the Office for National Statistics indicated that the number of claimant count jobless have likely been lifted by changes in benefit rules for lone parents which came into effect on 21 May The claimant-count unemployment rate is seen stable at 4.9% in July, where it has been since September 2011.
The number of jobless on the International Labour Organization (ILO) measure is seen falling by 45,000 in the three months to June to stand at 2.580 million. This would be less than the 65,000 drop seen in the three months to May. The number of jobless on the ILO measure is down from a 17-year high of 2.685 million in the three months to November 2011. The unemployment rate on the ILO measure is seen stable at 8.1% in the three months to June, which is down from a peak rate of 8.4% in late-2011/early-2012. Unemployment has been limited in recent months by restrained earnings growth, while an increase in people working part time and more people becoming self-employed has also helped matters.
ILO data are also likely to show that employment rose by around 155,000 in the three months to June to 29.388 million. This would be down on growth of 181,000 in the three months to May, which took the number of employed up to 29.354 million. This was the highest employment level since late 2008, and up from a low of 29,069 million in the three months to September 2011. In the three months to May, there was a rise of 133,000 in full-time workers to 21.367 million, while part-time workers were up by 48,000 to 7.987 million.
The big question is, can the labour market remain resilient given the economy’s ongoing weakness and the current very worrying and uncertain outlook?
We suspect that unemployment is headed higher later this year and will rise further in 2013 as a consequence of extended soft economic activity, heightened business caution, and public-sector jobs being pared substantially. Unless the economy starts showing sustained decent underlying improvement, pressure will increase on firms to release some of the workers that they have been holding on to. Reinforcing concern over the labour-market outlook, the July survey from the Recruitment and Employment Confederation (REC) and KPMG showed that the number of permanent placements fell for a second successive month.
We forecast the number of unemployed on the ILO measure to reach a peak of 2.80 million in 2013, which would see the unemployment rate reach 8.7%.
Average Earnings in June
Underlying average earnings growth (out Wednesday) is expected to have remained muted in June and substantially below past norms. This is the consequence of relatively high unemployment, workers' job insecurity, and a pressing need for many companies to limit their costs in a very challenging environment. Restrained earnings growth has clearly been an important factor helping to limit unemployment levels.
Specifically, underlying average weekly earnings growth (regular pay, excluding bonus payments) is seen remaining at 1.8% in the three months to June, having originally edged up to this level in the three months to April from 1.6% in the three months to March (which was the equal lowest level since mid-2010). Annual average weekly earnings (total pay) growth is also expected to come in at 1.8% in the three months to June, which would be up from 1.5% in the three months to May and 1.4% in the three months to April. Total earnings were dragged down in the early months of 2012 by 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 Bank of England's 2.0% consumer price inflation target. They are also still below current consumer price inflation levels (2.4% in June), so consumers’ purchasing power continues to be squeezed albeit at a significantly reduced rate compared with earlier in 2012 and, more particularly, in 2011.
Minutes of the August 2012 Bank of England MPC Meeting
On Wednesday, we will see the release of the minutes of the August meeting of the Bank of England's Monetary Policy Committee (MPC), wherein the committee made no further changes to monetary policy after extending its quantitative easing (QE) programme by GBP50 billion in July, which will take the stock up to GBP375 billion. Interest rates remained unchanged at 0.50%, where they have been since March 2009.
The main focus of interest in the August MPC minutes will be whether or not the committee discussed the case for boosting the amount of QE currently being enacted, given the larger-than-expected GDP contraction of 0.7% quarter-on-quarter in the second quarter and largely weak survey evidence for July. Whether they re-visited the case for lowering interest rates from the current level of 0.50% will be another area of interest.
Given the general tone of Sir Mervyn King’s comments at the press conference accompanying the release of the Bank of England’s Quarterly Inflation Report for August, we suspect that all nine MPC members were in favour of unchanged QE and interest rates at their August meeting.
King indicated that the MPC does not see an urgent need for further stimulative action, especially as the Funding for Lending Scheme only left the starting blocks at the beginning of August. Meanwhile, the additional GBP50 billion in QE that was enacted in July is scheduled to be utilized through to early November. So while the Inflation Report clearly left the door wide open for the Bank of England to act again, we suspect that the MPC will wait until November before delivering another GBP50-billion QE dosage, which will take the stock up to GBP425 billion. We also would not rule out more QE in 2013.
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 the profit margins of banks and building societies 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.
Significantly, King commented that cutting interest rates could damage some financial institutions and “would therefore be counter-productive, which is precisely why we haven’t done it.” While he acknowledged the situation could change, he said “I don’t think it is something that we would contemplate doing immediately.”
Retail Sales in July
Retail sales volumes (Thursday) are expected to have been flat month-on-month (m/m) in July, having edged up just 0.1% m/m in June. This would leave retail sales volumes up just 1.5% y/y in July. Survey evidence for July from both the BRC and the Confederation of British Industry (CBI) was pretty soft, indicating that retail sales had continued to be held back appreciably by the wet weather during much of the month hitting sales of seasonal products and outdoor goods. There were hints nevertheless that sales had improved towards the end of the month, helped by some drier weather and people buying more food and drink ahead of the Olympic Games.
Retailers are desperately hoping that the Olympics will end up providing a significant, if temporary, overall lift to their sales. On the positive side, there should be a boost to retail sales coming from people buying Olympic merchandise and souvenirs as well as more food and drink to enjoy the events more at home (there was evidence of this happening in late July in the BRC survey).
Retailers will also be hoping that the “feel-good factor” coming from a successful Olympic Games feeds through to lift consumer confidence and willingness to spend.
A key question is whether higher Olympic-related sales will outweigh the hit to footfall and spending coming from people avoiding the shops in London during the Olympics (due to concerns that there would be excessive congestion on the transport system). This will be partly determined by whether people not going to London to shop are shopping elsewhere or are just delaying the shopping that they would have done. Another key factor will be to what extent people are staying at home to watch the Olympics rather than going to the shops.
Retailers 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.
There are also 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 181,000 in the three months to May.
However, the likelihood is that even if consumer confidence has been lifted by a successful Olympics, it will only be limited and temporary, as the same pressures that were weighing down on consumers before the Olympics will still be there after. Despite the impressive haul of UK gold medals and the sense of pride in a well-run and successful Olympic event, this does not help consumers pay their bills or ease their job concerns. When their next credit card bill comes in, the boost to sentiment from the Olympics will probably soon fade.
It seems unrealistic to expect a sustained major pick-up in consumer spending in the near term at least. Consumer confidence is very low compared with long-term norms, and the worrying economic situation and outlook is likely to maintain a fair 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. 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 of that, there is a need for many consumers to deleverage.
By Howard Archer
14 Aug - Consumer Price Inflation, July (Month-on-Month): 0.0%
14 Aug - Consumer Price Inflation, July (Year-on-Year): 2.4%
14 Aug - Core Consumer Price Inflation (ex Food, Drink, Tobacco), July (Year-on-Year): 2.1%
14 Aug - Retail Price Inflation, July (Month-on-Month): -0.1%
14 Aug - Retail Price Inflation, July (Year-on-Year): +3.0%
14 Aug - Underlying Retail Price Inflation, July (Month-on-Month): -0.1%
14 Aug - Underlying Retail Price Inflation, July (Year-on-Year): +3.0%
15 Aug - Claimant Count Unemployment Rate, July (%): 4.9%
15 Aug - Claimant Count Unemployment Change, July (000s): +7.5
15 Aug - International Labour Organization Unemployment Rate, June (%): 8.1%
15 Aug – Employment, June (000s): +155
15 Aug - Average Weekly Earnings - total pay, June (3-Month/Year): +1.8%
15 Aug - Average Weekly Earnings - regular pay excluding bonus, June (3-Month/Year): +1.8%
15 Aug - Bank of England Monetary Policy Committee interest rate vote split, August (Hike-Unchanged-Cut): 0-9-0
15 Aug - Bank of England Monetary Policy Committee Quantitative Easing vote split, August (More-Unchanged-Reduced): 0-9-0
16 Aug - Retail Sales, July (Month-on-Month): 0.0%
16 Aug - Retail Sales, July (Year-on-Year): +1.5%
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