Falling retail sales and rising unemployment in August are expected to add to the recent stream of worrying news on the UK economy. Meanwhile, inflation is likely to have risen due to a jump in utility prices.
RICS Housing Market Survey for August
The August housing market survey from the Royal Institution of Chartered Surveyors (out overnight Monday/Tuesday) will as usual provide key information on the supply-demand metrics of the housing market, as well as latest price developments.
We suspect that the survey will show ongoing muted housing market activity and buyer interest compared to past norms, given largely unfavourable economic fundamentals and very low consumer confidence.
Of key interest will be the number of properties coming on to the market, particularly given likely ongoing muted buyer interest. If this shows further signs of falling, it would increase the likelihood that a shortage of properties could provide some support to house prices. Conversely, a steady supply of houses coming on to the market would tilt the supply-demand balance in favour of buyers and exert downward pressure on house prices. The last RICS survey indicated that the balance measuring the supply of new properties coming on to the market fell back to -7% in July from 0% in June and +14% in May. Meanwhile, the balance measuring new buyers’ enquiries climbed to +5% in July from +1% in June and 0% in June..
The RICS survey is expected to reveal that the balance of surveyors reporting that house prices rose over the previous three months fell back to -25% in August after improving to -22% in July from -26% in June and a 2011-low of -28% in May. This would be very low compared to long-term norms
We continue to believe that house prices are likely to fall by around 5% overall from current levels by mid-2012. We suspect that consumers’ squeezed purchasing power, tightening fiscal policy, a softening labour market and worries over the economic outlook will limit potential buyers and weigh down on house prices. These factors are seen outweighing the support to house prices coming from extended very low interest rates
Consumer Price Inflation in August
Data out on Tuesday are expected to show annual consumer price inflation rose to 4.6% in August from 4.4% in July. This increase is expected to be driven by the sharp rises in electricity and gas prices that were enacted by several utility companies in August. Core consumer price inflation is expected to have edged back to 3.0% in August after rising to 3.1% in July from 2.8% in June. The shop price deflator produced by the British Retail Consortium indicated that overall shop price inflation moderated to 2.7% in August from 2.8% in July, as an easing back in food price inflation to 5.0% from 5.2% outweighed a marginal increase in non-food prices to 1.4% from 1.3%.
There remains a strong likelihood that consumer price inflation will hit 5.0% in the near term due to jumps in utility prices. Consumer price inflation will hopefully start edging down late this year and then fall back markedly in 2012, as the upward impact from past VAT developments, earlier jumps in energy, commodity and food prices, and sterling's past sharp depreciation wanes. In addition, extended soft economic activity and ongoing muted wage growth amid significant labour market slack is expected to limit underlying inflationary pressures.
Inflation should dip markedly at the start of 2012, as the impact of the January 2011 VAT hike from 17.5% to 20% drops out. We forecast consumer price inflation to be down to the Bank of England’s target level of 2.0% by the end of 2012, and it could very well dip below this level in 2013. Much will obviously depend on oil price developments.
Trade Deficit in July
The total trade deficit (out on Tuesday) is expected to have narrowed to £4.1 billion in July, after jumping to a 2011 high of £4.5 billion in June from £4.0 billion in May and a low of £2.2 billion in February. Even so, this would be well above the average monthly deficit of £3.3 billion over the first six months of 2011. Within, this, the traded goods deficit is forecast to have narrowed to £8.5 billion in July after spiking up to a 2011-high of £8.9 billion in June from £7.3 billion in May and a low of £6.9 billion in February. Again, this would be well above the average £7.8 billion monthly deficit seen in the first half of 2011.
Following a healthy start to the year, the trade performance has been pressurized by slowing global growth hitting exports. It is notable that exports of traded goods excluding oil dropped 3.2% month-on-month in June. Furthermore, the export orders index of the manufacturing purchasing managers’ survey sank to a 27-month low in August and indicated only the second month of contraction in export orders since mid-2009. The CBI’s industrial trends survey portrayed a healthier picture on export orders, but it has been softer overall recently.
At the same time though, it is evident that UK imports are being limited by soft domestic demand. Imports of traded goods excluding oil fell 4.2% month-on-month in June.
Unemployment in August
Labour market data on Wednesday are likely to show further deterioration after a markedly weaker report for July. Claimant count unemployment is forecast to have risen by a further 35,000 in August after jumping 37,100 in July (which had been the largest increase since May 2009). This would be a sixth successive increase and take the number of claimant count unemployed up to a 19-month high of 1.599 million in August from a 24-month low of 1.4498 million in February. While claimant count unemployment is being pushed up by changes made to the benefits system earlier this year, the recent deterioration clearly runs deeper than that. The claimant count unemployment rate is expected to have climbed to 5.0% in August from 4.9% in July, 4.8% in June, and a low of 4.5% in the five months through to March.
Furthermore, the number of jobless on the International Labour Organization (ILO) measure is seen rising by around 90,000 in the three months to July to move back above 2.5 million at 2.52 million. This would see the ILO unemployment rate at 7.9%. ILO data are also likely to show that employment rose by around just 10,000 in the three months to July to 29.25 million. This would compare very unfavourably to increases of 80,000 in the three months to April, and 118,000 in the three months to March.
The worry is that, having showed impressive resilience, the labour market is now increasingly buckling under serious pressure from weak economic activity and accelerating job losses in the public sector. We expect unemployment to continue to rise over the latter months of 2011 and the first half of 2012, as public sector jobs are increasingly pared and private sector companies become more cautious in the face of persistently sluggish economic activity. We think unemployment on the ILO measure could very well reach a peak around 2.7 million in 2012, taking the unemployment rate up to 8.5%
Average Earnings in July
Average earnings growth (out Wednesday) is expected to have remained very low compared to past norms. This is the consequence of relatively high unemployment, workers' job insecurity, and the ongoing need for companies to limit their costs in a challenging environment. Specifically, underlying average weekly earnings growth (regular pay – excluding bonus payments) is seen stable at 2.2% in the three months to July. Annual average weekly earnings (total pay) growth is expected to have climbed to 2.7% in the three months to July from 2.6% in the three months to June, but this would be driven by higher bonus payments compared to a year ago. These rates are well 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 well below current inflation levels.
It is evident that significant slack in the labour market, workers’ job insecurity, and the need for companies to contain their costs in a very challenging and competitive environment is preventing higher inflation and elevated household inflation expectations feeding through to push up wages significantly. We expect this to remain the case so households' purchasing power will continue to be squeezed markedly.
Retail Sales in August
Retail sales volumes (out Thursday) are expected to have fallen 0.2% month-on-month in August after an increase of 0.2% in July. This would leave retail sales volumes down 0.1% year-on-year in August. The British Retail Consortium (BRC) and CBI have both released very weak surveys for August.
The likelihood is that consumers will be very cautious in their spending over the coming months, which will limit overall growth prospects appreciably given that consumer spending accounts for some 65% of GDP.
Consumer confidence is very low, with purchasing power under severe pressure from high inflation, muted wage growth and tighter fiscal policy. Indeed, a sharp jump in utility charges in August is adding to the squeeze on many consumers. Meanwhile, unemployment is rising and the jobs outlook is looking increasingly worrisome.
The current turmoil in financial markets and heightened fears of a renewed serious global economic downturn is unlikely to do much for consumers’ confidence and willingness to spend. Indeed, many consumers are being hit by the fall in equity prices. On top of this, the weak housing market has adverse repercussions for consumer spending (a healthy housing market activity boosts demand for carpets, fittings and furnishings as well as major household appliances while rising house prices can have a significant wealth effect).
The only real good news for consumers at the moment is that it now looks highly likely that the Bank of England will hold off from raising interest rates for some considerable time to come, very possibly even until 2013. Even small interest rate rises could present serious problems for financially.
By Howard Archer
13 Sep - RICS House Price Balance, August: -25
13 Sep - Consumer Price Inflation, August (Month-on-Month): +0.7%
13 Sep - Consumer Price Inflation, August (Year-on-Year): +4.6%
13 Sep - Core Consumer Price Inflation (ex Food, Drink, Tobacco), August (Year-on-Year): +3.0%
13 Sep - Retail Price Inflation, August (Month-on-Month): +0.7%
13 Sep - Retail Price Inflation, August (Year-on-Year): +5.2%
13 Sep - Underlying Retail Price Inflation, August (Month-on-Month): +0.7%
13 Sep - Underlying Retail Price Inflation, August (Year-on-Year): +5.3%
13 Sep - Non-EU Visible Trade Balance, July (GBP/Month): -5.3
13 Sep - Visible Trade Balance, July (GBP/Month): -8.5
13 Sep - Total Trade Balance, July (GBP/Month): -4.1
14 Sep - Claimant Count Unemployment Rate, August (%): 5.0%
14 Sep - Claimant Count Unemployment Change, August (000s): +35
14 Sep - International Labour Organization Unemployment Rate, July (%): 7.9%
14 Sep - Average Weekly Earnings - total pay, July (3-Month/Year): +2.7%
14 Sep - Average Weekly Earnings - regular pay excluding bonus, July (3-Month/Year): +2.2%
15 Sep - Retail Sales, August (Month-on-Month): -0.2%
14 Sep - Retail Sales, August (Year-on-Year): -0.1%