Preview of Main U.K. Economic Releases for Week Beginning 8 June

Even so, we remain skeptical that house prices have bottomed out, despite both the Nationwide and the Halifax reporting month-on-month increases in May. Significantly, it is not uncommon for there to be months of rising prices when house prices are still trending down. Housing market activity is still very low by past norms and at a level consistent with falling house prices. Furthermore, despite markedly rising buyer interest, we believe that the pick up in actual house purchases is likely to be gradual and fitful for some time to come given ongoing tight credit conditions and still relatively poor economic fundamentals (even allowing for the recent mounting signs that the economy may now be at least temporarily stabilizing).

The British Retail Consortium (BRC) retail sales monitor for May (also out overnight on Monday/Tuesday) is expected to show significantly reduced year-on-year growth in sales after they were lifted substantially in April by this year's later Easter and particularly good weather over the holiday period. Specifically, the consensus is for total sales to have risen by 2.9% year-on-year in May, which would be down from an increase of 6.3% in April. On a like-for-like basis (which strips out the effect of additional floor space), retail sales are seen increasing by 0.9% year-on-year in May after a rise of 4.6% in April. Even so, these would be firmer than the sales figures at the start of this year. The Confederation of British Industry has already released its distributive trades survey for May, which showed that the balance of retailers reporting that their sales were up year-on-year relapsed to -17% in May from +3% in April. Nevertheless, May still saw the second best reading for 11 months.

Overall, it appears that consumers have recently been a little more prepared to spend as their purchasing power is lifted by sharply reduced mortgage payments and lower inflation. The problem remains, though, that consumers are under serious pressure from sharply higher and rising unemployment, markedly reduced earnings growth and elevated debt levels. Meanwhile, credit conditions are still tight and many consumers are keen to retrench due to serious concerns about the economy and jobs, as well as a desire to improve their balance sheets.

Latest survey evidence from the purchasing managers, CBI and Engineering Employers Federation (EEF) indicate that the rate of contraction in the manufacturing sector is now moderating substantially after output plunged 5.5% quarter-on-quarter in the first quarter. We expect this to be reflected in the manufacturing output and industrial production data for April out on Wednesday. Specifically, we expect manufacturing output to have edged down by just 0.1% month-on-month in April, as it did in March. This was the smallest drop for 13 months. Nevertheless, manufacturing output would still be down by 12.8% year-on-year in April. Meanwhile, the fall in industrial output is seen moderating to 0.2% month-on-month in April from 0.6% in March when it was pushed down by substantial falls in mining and quarrying activity and also in utilities' output. This would leave industrial output down 12.5% year-on-year in April.

The manufacturing sector is now clearly being helped by the substantial de-stocking that has taken place and it also appears to have benefited more overall recently from the boost to competitiveness stemming from the weaker pound. Nevertheless, manufacturers still face serious handicaps and actual sustainable growth in the sector may yet be some way off. Manufacturers are still battling against muted domestic and export demand, intensified competition, worsened cash flows and very tight credit conditions. Furthermore, manufacturers will be hoping that sterling does not significantly extend its current rally.

The trade deficit (out Wednesday) is expected to have narrowed modestly further in April after falling in both March and February. There are some signs that the sharp overall 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 muted U.K. domestic demand.

By Howard Archer