Key U.K. Economic Releases for Week Commencing 17 November

Important indications as to just how large an interest-rate cut could occur in December and how low rates could eventually fall in 2009 may well be provided by Wednesday's release of the minutes of the November meeting of the Bank of England's Monetary Policy Committee (MPC). This meeting saw the MPC slash interest rates 150 basis points from 4.50% to 3.00%, and much interest will focus on whether all nine MPC members favored this large cut. It will also be very interesting to see if an even larger cut was discussed, and whether the minutes indicate that the MPC felt that it would need to quickly follow November's cut with another one. We suspect that a 50-basis-point interest-rate cut from 3.00% to 2.50% is the absolute minimum that will occur in December, and we are increasingly leaning toward the view that the Bank of England will slash interest rates by a further 100 basis points to 2.00%. Furthermore, interest rates seem ever more likely to fall as low as 1.00% in 2009.

Consumer price inflation (out Tuesday)is forecasted in October to have started what is likely to be a sharp retreat from September's peak of 5.2%. Specifically, we expect the annual consumer price inflation rate to have fallen to 4.8% in October. We suspect that a sharper fall is likely to have been prevented by still-rising utility prices. Core consumer price inflation is forecasted to have eased to 2.0% in October from 2.2% in September. Meanwhile, underlying retail price inflation is expected to have retreated to 5.2% y/y in October from 5.5% in September, while headline retail price inflation is seen moderating to 4.5% from 5.0%.

Inflation is poised to drop like a stone over the coming months because of lower oil, commodity, and food prices, very favorable base effects, and rapidly diminishing underlying inflation pressures. Inflation expectations are retreating, wage moderation is continuing, and latest survey evidence shows that companies' pricing power is increasingly undermined by markedly weakening demand and intensifying competition. Consequently, we expect annual consumer price inflation to fall to just 0.5% by the end of 2009.

Latest manufacturing data and survey evidence have been dire, and the Confederation of British Industry (CBI)'s industrial trends survey for November (out Wednesday) is likely to continue this trend. Manufacturers are being hit hard by depressed domestic demand, weakening activity in key export markets, tight credit conditions, and extended, elevated input costs. While the significantly weaker pound is helping U.K. manufacturers, that aid is more than offset by deteriorating domestic demand in key export markets, notably the Eurozone and the United States.

We expect the CBI's survey to show that the balance of manufacturers reporting that their overall orders are at normal levels deteriorated to 42% in November after plunging to a five-year low of -39% in October from -26% in September. This is expected to be due to sharply falling domestic and foreign orders. Production expectations are expected to remain depressed after plummeting to a 28-year low in October. Meanwhile, the balance of manufacturers expecting to raise their prices over the next three months seems highly likely to fall markedly further after dropping to +10% in October from +23% in September and an 18-and-a-half-year high of +34% in July. Sharply contracting demand and activity are now substantially diluting manufacturers' pricing power.

Retail sales volumes (out Thursday) are forecasted to have fallen 0.8% month-on-month in October, after dropping 0.4% in September. This decline would reduce the y/y increase to just 1.5%. Retail sales have been extremely volatile recently according to the hard data, but the underlying trend is clearly weakening markedly. Furthermore, the British Retail Consortium (BRC) survey for October showed marked deterioration.

Retailers will be desperately hoping that last week's slashing of interest rates from 4.50% to 3.00% by the Bank of England will significantly boost sales as the vital Christmas shopping period gets under way. Their hopes will have been lifted by the fact that mortgage lenders are largely passing this cut on, having come under major pressure from the government to do so. Nevertheless, we suspect that retailers face a very difficult Christmas period, and life looks likely to remain tough for some considerable time thereafter. Despite the sharp interest-rate cut, we strongly suspect that consumer spending will be held in check by the squeeze on purchasing power coming from increased utility bills and still relatively high food prices, muted income growth, faster rising unemployment, plunging house prices, sharply lower equity prices, very tight credit conditions, and increased debt levels. Meanwhile, savers will have been hit by the sharp interest-rate cut. On top of this, serious concerns about the economy, jobs, and the financial crisis are highly likely to lead to considerable consumer caution in their spending.

Consequently, we suspect that many retailers will increasingly feel the need to engage in discounting, special promotions, and flash sales during the run-up to Christmas to try to get hard-pressed consumers to spend. An easing in the retail sales price deflator for October would indicate that this is already happening. The latest data show that the y/y rise in the retail sales price deflator edged up to 1.0% in September, having dipped to 0.9% in August from 1.7% in July (which had been the largest increase since January 1999).

The public finances for October (out Thursday) are expected to show further marked deterioration, as sharply weaker economic activity takes an increasing toll on value-added tax (VAT) and corporation tax receipts, while extremely low housing market activity and markedly falling house prices hit stamp-duty receipts (plus the government's exemption for a year of the payment of 1.0% stamp duty on the purchase of properties costing up to £175,000). Meanwhile, increasingly rising unemployment will push up benefit claims. We expect there to have been a Public Sector Net Borrowing Requirement (PSNBR) of £1.5 billion in October compared with a repayment of £1.9 billion a year earlier.

The poor state of the public finances will not prevent the government from pressing ahead with its plans to introduce a number of stimulative measures in the Pre-Budget Report on Monday, 24 November. Both the chancellor and the prime minister have stressed that fiscal action is needed now, along with the slashing of interest rates by the Bank of England, to try to ensure that the recession is as short and shallow as possible. The fiscal stimulus will be financed by higher borrowing, but the government will need to map out how it plans to bring the public finances back to a sustainable position over the longer term.

 By Howard Archer

18 Nov - Consumer Price Inflation, October (month-on-month): +0.1%
18 Nov - Consumer Price Inflation, October (year-on-year): +4.8%
18 Nov - Core Consumer Price Inflation (ex Food, Drink, Tobacco), October (year-on-year): +2.0%
18 Nov - Retail Price Inflation, October (month-on-month): +0.0%
18 Nov - Retail Price Inflation, October (year-on-year): +4.5%
18 Nov - Underlying Retail Price Inflation, October (month-on-month): +0.1%
18 Nov - Underlying Retail Price Inflation, October (year-on-year): +5.2%

19 Nov - Bank of England Monetary Policy Committee vote split, November (Hike-Unchanged-Cut): 0-0-9

19 Nov - CBI Monthly Industrial Trends Total Orders, November (balance): -42%

20 Nov - Retail Sales, October (month-on-month): -0.8%
20 Nov - Retail Sales, October (year-on-year): +1.5%