15 May 2017
Week Ahead: Retail sector likely to be a drag on Q1.17 GDP
Week ahead written in conjunction with the international economic contributions from Philip Shaw (PS), Victoria Clarke (VC) Ryan Djajasaputra (RD) and Amea Koziol (AK).
(PS) UK watchers will be paying close attention to both economic and political developments next week. The constant stream of pre-election news will be accompanied by key economic releases including inflation, labour market figures and retail sales. On our forecasts, CPI inflation will rise to 2.7% from 2.3%, although some of the rise is likely to reflect Easter timing issues on airfares and therefore prove temporary. Labour market data should provide a reality check on domestically generated inflation pressures in the sense that we expect pay growth to remain to remain subdued, both on a headline level and excluding bonuses. We also expect April’s retail sales to rebound (by 1.0%) after March’s 1.8% decline on the month. This should not be read as heralding a consumer revival, although we doubt (hope?) that Q1.17’s 1.4% decline on the quarter will be repeated any time soon.
Overall we note the Bank of England’s warning earlier today that, on its forecasts, the yield curve had been pricing in too few interest rate increases over the next three years (it has steepened recently). That said, we continue to expect Brexit related uncertainties to result in the Bank rate remaining at 0.25% until the second half of 2019.
On the political side we may see the release of the Conservative party manifesto next week. Key here is whether the Tories promise to freeze (or lock in) current rate of taxation (our view is that they will not). We may also see the (official) launch of Labour’s programme. But the main point is that while opinion polls continue to show a blockbusting Conservative lead (broadly the range has been 15%-25%), markets will not ask too many questions.
Investors will wake up on Monday to a cluster of Chinese activity data, including industrial production. The ‘hard’ numbers have been firmer than expectations recently although the latest round of surveys has shown a degree of retracement. While a relatively buoyant China has raised confidence in global economic prospects, the opposite is true in Chinese markets, where robust data are seen to give Beijing greater leeway to announce tighter macroprudential measures. Indeed Chinese sovereign yields are at 2½ year highs, while the Shanghai Composite index has slipped by 7% over the past month.
Meanwhile in the US, markets’ attention will mainly be on survey data, including Friday’s Philly Fed index. We would point out again that survey evidence in the US (and the Euro area) has been outpacing official numbers recently, even if one ‘adjusts’ for the soft Q1.17 GDP print.
In the Euro area, we get dribs and drabs of data including revisions (and more country detail) to Q1.17 GDP and final HICP figures. There has been little recently to shake our view that the ECB will taper its QE purchases over Q1.18.