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Preview: Inflation dominates vital week ahead for UK economy

Sunday, 12 February 2012 10:13 AM

There are some vital announcements coming up in what is a big week for the UK economy to see if the positive data that came from January’s manufacturing and services sector purchasing managers’ index reports can be backed up by more good news.

Overnight Monday sees the Royal Institute of Chartered Surveyors (RICS) report on the level of activity in the housing market in January.

On Tuesday the Office for National Statistics (ONS) release the latest consumer prices inflation data for January which will hopefully continue its downward trajectory.

Unemployment and earnings data is released on Wednesday. It is expected that unemployment will have continued to rise, whilst wage settlements and earnings growth are likely to continue to have been muted.

Wednesday also sees the Bank of England release their quarterly inflation report which should provide some clues over the monetary policy the bank will follow in the coming months and whether yet more quantitative easing is likely to follow the £50 billion announced last week.

Finally, retail sales data is out on Thursday which will give some indication as to the extent of the hangover the UK public has felt from the excesses of Christmas shopping.

Howard Archer, Chief UK & European Economist at HIS Global takes us through his expectations on what this week’s announcements will say.

RICS Housing Market Survey for January

"We expect the RICS survey to reveal that the balance of surveyors reporting that house prices rose over the previous three months edged back to -18% in January after rising to -16% in December from -17% in November and -24% in October.

"We expect house prices to fall by 5% in 2012. Despite a recent modest rise in mortgage approvals, housing market activity remains very low compared to long term norms, and it is likely to be increasingly pressurized in the early months of 2012 at least by weakened economic activity, rising unemployment, muted wage growth and very low consumer confidence. These factors are seen countering the support to the housing market coming from extended very low interest rates."

Consumer Price Inflation in January

"Data out on Tuesday are expected to show that consumer price inflation retreated markedly further to a 14-month low of 3.6% in January after dipping to 4.2% in December from 4.8% in November and a three-year high of 5.2% in September 2011.

"Inflation is expected to have fallen appreciably further in January as a result of much of the impact of the January 2011 VAT increase from 17.5% to 20.0% dropping out.

"Inflation should fall markedly further in February, helped by favourable base effects reflecting the fact that a significant number of retailers delayed passing on the VAT hike at the start of 2011. Also helping matters will be the trimming of energy prices in February that have been announced by utility companies.

"We expect consumer price inflation to trend down steadily to stand around 2.0% by the end of 2012." 

Unemployment in January

"Labour market data on Wednesday are likely to show further softness overall. In particular, the number of jobless on the International Labour Organization (ILO) measure is seen rising by around 85,000 in the three months to December to reach a 17-year high of 2.707 million. This would see the ILO unemployment rate rise to 8.5%. ILO data are also likely to show that employment rose by around 60,000 in the three months to December to 29.130 million. However, this is likely to have been inflated by increased part-time jobs and full-time employment could well have fallen.

"Claimant count unemployment is forecast to have risen by 5,000 in January. This would be an 11th successive increase and take the number of claimant count unemployed up to a 24-month high of 1.6020 million in January from a 24-month low of 1.4498 million in February 2011.

"We expect the number of jobless on the International Labour Organization measure to reach a peak around 2.90 million in the fourth quarter of 2012, which would see the unemployment rate reach 9.0%. However, there is a very real risk that unemployment could keep on rising into 2013 and reach 3.0 million."

Average Earnings in December

"Underlying average earnings growth (out Wednesday) is expected to have remained muted in December and substantially below past norms. This is the consequence of relatively high and rising unemployment, workers' job insecurity and a pressing need for many companies to limit their costs in a very challenging environment."

Bank Of England Quarterly Inflation Report for February

"The Bank of England’s Quarterly Inflation Report for February (out on Wednesday) will offer important clues as to how monetary policy is likely to develop over the coming months following the decision of the Monetary Policy Committee (MPC) to enact a further £50 billion of Quantitative Easing at their February meeting.

"We suspect that the Inflation Report will leave the door open to further Quantitative Easing and also indicate that interest rates are likely to remain at the current level of 0.50% for some considerable time to come.

"We doubt that the Bank of England is done yet on Quantitative Easing and expect another £50 billion dosage in May which would take the total up to £375 billion. This reflects our belief that the economy will essentially flat-line during the first half of the year before starting to grow modestly in the third quarter."

Retail Sales in January

"Retail sales volumes (out Friday) are expected to have fallen by 0.3% month-on-month in January, which would see them up by just 0.5% year-on-year.

"Survey evidence from both the British Retail Consortium and the Confederation of British Industry was weak for January, indicating that still pressurized and worried consumers tightened their purse strings after a limited spending flurry in December. Specifically, retail sales volumes rose 0.6% month-on-month and 2.5% year-on-year in December as they were lifted appreciably by earlier and increased discounting by retailers as they strived to get financially squeezed and worried consumers to part with their cash over the critical Christmas period.

"It is hard to be optimistic over the prospects for consumer spending in the early months of 2012 at least. Consumers’ confidence is still very low despite picking up in January, while their purchasing power is still under severe pressure from relatively high inflation, muted wage growth and tight fiscal policy. Meanwhile, unemployment is rising markedly and the jobs outlook currently looks pretty bleak at the moment. On top of this, debt levels are high and there is a need for, and desire of, many consumers to improve their finances, which is limiting their willingness to spend."

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