Unemployment and Public Finances Head U.K. Economic Releases for the Week Commencing 15 March

Data on Wednesday is likely to show that claimant-count unemployment rose modestly further in February having spiked up 23,500 in January after falling in both December (by 9,600) and November (by 10,800). December and November's falls had been the first drops in claimant-count unemployment since February 2008; January's renewed, and marked, rise provided somewhat of a reality check on the state of the labor market.

The economy does not seem strong enough at this stage to prevent further job losses and the fall in unemployment late in 2009 had masked the fact that full-time employment was still falling appreciably. Yes, the worst of the job losses are behind us; and, yes, overall job losses have been less than feared due to employer and worker flexibility, but it is unrealistic to expect the number of unemployed to have peaked when the economy has only just started to grow modestly after extended, deep recession and while serious concerns remain about the strength and sustainability of the recovery.

Specifically, we forecast the number of claimant-count unemployed to have risen 8,000 in February to reach a 13-year high of 1.6436 million. The claimant-count unemployment rate is expected to have risen to 5.1% in February from 5.0% in January. Meanwhile, the number of jobless on the International Labour Organization (ILO) measure is seen essentially flat in the three months to January at 2.482 million, thereby giving an ILO unemployment rate of 7.9%.

Average weekly earnings are expected to have risen just 0.9% year-on-year (y/y) in the three months to January as they were limited by low bonus payments. Furthermore, underlying average weekly earnings remain under serious downward pressure from high unemployment, still-significant job insecurity, and the need for companies to contain their costs in the face of still-muted demand and reduced profitability. As a result, annual average weekly earnings growth (regular pay excluding bonus payments) is seen limited to 1.3% in the three months to January.

Minutes of March Bank of England MPC Meeting

Wednesday also sees the release of the minutes of the March meeting of the Bank of England's Monetary Policy Committee (MPC). At the meeting, the MPC kept monetary policy on hold with interest rates staying at the record-low level of 0.50% and the committee opting not to add to the £200 billion that the Bank of England has already spent on its quantitative easing program. All nine MPC members voted for unchanged interest rates and quantitative easing in February, and there seems little reason to expect anyone to have changed their mind at the March meeting.

Evidence available so far suggests overall that economic activity bounced back relatively well in February after taking a significant weather-related hit in January. This diluted the case for quantitative easing to be revived at the March MPC meeting. In addition, the MPC was likely to have been reluctant to have engaged in further quantitative easing with latest data showing consumer price inflation spiking to 3.5% in January, even though the Bank of England still expects inflation to be back below 2.0% by the end of the year. Sterling's recent slump may also have counted against further quantitative easing.

The Bank of England is very aware that just as January's data undoubtedly overstated the weakness of the economy because of the bad weather hurting activity, so February's data may well overstate the economy's current strength as some of January's lost business is made up. The MPC is likely to remain very much in "wait and see" mode until the distortions to activity work through and a clearer picture of the economy emerges.

When a clearer picture does emerge, we expect it to show that the economy is developing only a bumpy, gradual recovery in the face of still very challenging conditions and the loss of some props, including lower value-added tax (VAT; it rose to 17.5% again from 15.0% in January) and the car scrappage scheme (which ends this month). This is likely to limit underlying inflationary pressures and lead to the Bank of England keeping interest rates at 0.50% through 2010. Furthermore, we certainly would not rule out further quantitative easing, given the serious headwinds that the recovery still faces, although we suspect that most MPC members would prefer not to go down that road.

Public Finances in February

Following January's truly dire data, the public finances for February (Thursday) are expected to show less deterioration compared with a year earlier. January's public finance figures suffered hugely from the fact that it is a key month for self-assessed income tax and corporation tax receipts, but these were for a period when the recession was particularly deep. In fact, there had previously been hints in the November and December data that the rate of deterioration in the public finances was slowing in reaction to the economy exiting recession in the fourth quarter of 2009 and unemployment falling at a reduced rate. In addition, tax revenues will benefit to a limited extent from VAT rising to 17.5% in January. Nevertheless, we are looking for a hefty Public Sector Net Borrowing Requirement (PSNBR) of £13.5 billion in February, which would be up from £9.0 billion in February 2009.

Even if the rate of deterioration in the public finances does show evidence of moderating in February, the data will hardly provide the most appetizing of backdrops for Chancellor Alistair Darling to present his budget on 24 March. Last December's Pre-Budget Report left many questions unanswered over how exactly the government will return the public finances to health over the medium term. While it is likely that many spending cuts and tax rises will not be announced until after the looming general election is out of the way, if the next government fails to address the issues at an early stage, it is likely that the credit agencies and the markets will lose patience with potentially dire consequences for the U.K. economy.

CBI Industrial Trends Survey for March

The Confederation of British Industry (CBI) industrial trends survey for March is also out on Thursday, and it is expected to show that the balance of manufacturers reporting that their orders are at normal levels improved to -34%, from -36% in February, -39% in January, and a 17-year low of -58% in March 2009. Although recently released hard data from the Office for National Statistics revealed that manufacturing output disappointingly fell 0.9% month-on-month (m/m) in January, this was clearly heavily influenced by production being disrupted by the heavy snow and freezing weather conditions. There also appears to have been some corrective element after manufacturing output surged 0.9% m/m in December.

Just as December's 0.9% jump in manufacturing output overstated the sector's strength, so January's 0.9% drop overstated its weakness. The overall impression we get from the recent data and survey evidence is that manufacturers are currently seeing a reasonable, but far-from-spectacular pickup in activity after a largely dire 2009 as they benefit from leaner stock levels, improved competitiveness in both domestic and foreign markets stemming from the weak pound, and recently firmer demand in key overseas markets. There are also signs from the surveys that domestic demand has picked up recently. Nevertheless, serious uncertainties remain about the strength of demand for manufactured goods over the medium term, particularly once stimulative measures start being withdrawn.

by Howard Archer

17 Mar - Bank of England Monetary Policy Committee interest rate vote split, March (Hike-Unchanged-Cut): 0-9-0
17 Mar - Bank of England Monetary Policy Committee Quantitative Easing vote split, March (More-Unchanged-Reduced): 0-9-0
17 Mar - Claimant Count Unemployment Rate, February (%): 5.1%
17 Mar - Claimant Count Unemployment Change, February (000s): +8
17 Mar - International Labour Organization Unemployment Rate, January (%): 7.9%
17 Mar - Average Weekly Earnings - total pay, January (3-Month/Year): +0.9%
17 Mar - Average Weekly Earnings regular pay excluding bonus, January (3-Month/Year): +1.3%
18 Mar - CBI Industrial Trends, Total Orders, March: -34%
18 Mar - Public Sector Net Borrowing Requirement, February (GBP/Bln): 13.5