Preview of Main U.K. Economic Releases for the Week Beginning 15 June

Recent speeches by MPC members indicate that the committee is encouraged by the recent signs of improvement in the economy, but remains cautious about the longer-term prospects for sustainable growth. There is significant concern within the MPC that economic activity could be hindered for some considerable time to come by the ongoing need for financial institutions, households, and companies to adjust their balance sheets. In addition, serious concerns persist about the tightness of credit conditions. Consequently, we expect the minutes to indicate that interest rates are likely to stay at 0.50% for some time to come and to keep the door very much open to a further extension of the quantitative easing program.

Latest data and survey evidence indicate that the manufacturing sector is currently benefiting appreciably from the major de-stocking that has occurred and, to a lesser extent, the boost to competitiveness stemming from the overall marked depreciation of the pound. Indeed, hard data show that industrial production rose for the first time in 14 months in April (by 0.3% month-on-month—m/m) with manufacturing output rising by 0.2% for a second month running. We expect an improved Confederation of British Industry's industrial trends survey for May (out Wednesday).

Specifically, we forecast the survey to reveal that the balance of manufacturers reporting that their overall orders were at normal levels climbed to -48% in June, from -56% in May, -57% in April, and a 17-year low of -58% in March. This is likely to be helped by an improvement in the export orders sub-index. In addition, the balance of companies expecting output to rise over the next three months may well have risen further after improving markedly to an eight-month high of -17% in May, from -32% in April and a 28-year low of -48% in March. Nevertheless, the survey is still likely to show that a clear balance of manufacturers is expecting to trim prices over the next three months as they face intense competition and still relatively muted demand.

Inflation data for May (out Tuesday) should show a continuation of the recent marked downward trend, reflecting very favorable base effects as the impact of last year's sharp rises in oil prices drop out of the calculation. In addition, utility prices have been cut. Meanwhile, there is serious pressure on retailers and companies through the supply chain to price competitively. Furthermore, the British Retail Consortium's shop price deflator also indicated the upward pressure from food prices continued to moderate in May. Nevertheless, there will be some upward impact on inflation from the raising of excise duty on tobacco and alcohol in April's budget. In addition, oil prices have risen markedly from the lows seen earlier this year, although this is being partly countered by sterling also rallying significantly from its lows seen around the turn of the year.

On balance, we expect consumer price inflation to have fallen to a 20-month low of 2.0% in May, from 2.3% in April and a peak of 5.2% in September 2008. This would take it to the Bank of England's target rate. Core consumer price inflation is seen moderating to 1.4% in May, from 1.5% in April. Most eye-catchingly, the year-on-year (y/y) decline in retail prices is seen widening to 1.5% in May, from 1.2% in April, as it is brought down by sharply lower mortgage interest rates. Meanwhile, annual underlying retail price inflation is expected to have fallen to 1.3% in May from 1.7% in April.

Data out on Wednesday are expected to reveal that unemployment is continuing to rise markedly, but the increase in the number of jobless remains substantially below the record spike seen in February. Claimant-count unemployment is forecasted to have climbed by 65,000 in May, which would take it up to 1.578 million. This would be up from an increase of 57,100 in April, but less than half of the 136,600 jump seen in February. The claimant-count unemployment rate is seen rising to 4.9% in May from 4.7% in April, taking it to its highest level since October 1997. Meanwhile, unemployment on the International Labour Organization (ILO) measure is seen rising by around 220,000 in the three months to April compared with the three months to January, as it is inflated by February's jump in the number of jobless. This would take unemployment on this measure to 2.250 million, giving an unemployment rate of 7.3%.

Despite growing hopes that the economy could have at least temporarily stabilized, unemployment is a lagging indicator and the extended, deep economic contraction seen in the second half of 2008 and the first quarter of 2009 is continuing to feed through to hit the jobs market hard. Furthermore, considerable uncertainties remain about the strength and sustainability of any recovery going forward, and the economy seems highly likely to shed jobs well into 2010.

Meanwhile, average earnings are expected to have edged up by just 0.3% y/y in the three months to April, as they were dragged down by sharply reduced bonus payments. Underlying average earnings are also under serious downward pressure from sharply higher and rising unemployment, heightened job insecurity, negative retail price inflation, and the need for companies to contain their costs in the face of markedly reduced demand. Consequently, annual underlying average earnings (excluding bonus payments) growth is seen falling to 2.8% in the three months to April, which would be the lowest level since the series began in 2001. These rates compare with the 4.5% level that the Bank of England considers broadly consistent with its 2.0% consumer price inflation target.

Retail sales (out Thursday) are forecasted to have grown at a significantly reduced rate of 0.3% m/m in May, after rising by 0.9% in April when they were buoyed by this year's later Easter as well as very good weather over the holiday period. Retail sales are actually seen falling 0.3% y/y in May, reflecting the fact that they spiked up sharply in May 2008. On the positive side, sharply reduced mortgage payments and moderating inflation are boosting many people's purchasing power. Nevertheless, consumers remain under serious pressure from sharply higher and rising unemployment, markedly reduced earnings growth, and heightened debt levels. Meanwhile, credit conditions are still tight and many consumers are keen to retrench because of serious concerns about the economy and jobs, as well as a desire to improve their balance sheets.

The public finances for May (out Thursday) will undoubtedly once again make dismal reading. Tax revenues are being decimated by extendedly extremely weak economic activity, declining corporate profitability, sharply higher and rising unemployment, markedly reduced bonus payments, the December 2008 value-added tax cut, and muted housing market activity and reduced prices. Meanwhile, sharply higher unemployment is also resulting in higher benefit claims, thereby pushing up government expenditure. Consequently, we expect the Public Sector Net Borrowing Requirement (PSNBR) to have soared to £19.5 billion in May, from £12.2 billion in May 2008.

by Howard Archer