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Economic preview: testing the squeeze on UK households Neil Dennis 15:00, 15 October 2017 Analysis

Real wage growth in the UK has been a negative figure for some months now and has been shown to be putting a strain on households' spending power, which risks damping an already limp rate of growth.

Investors will see this week if the gap between consumer price inflation (CPI) and annual average wage growth has grown further – evidence, perhaps that the Bank of England needs to start thinking about cooling price growth.

UK consumer prices and producer price inflation

The annual rate of inflation in the UK officially stands at 2.9%, data from August showed, and many economists believe that rising import costs, due to the weak pound, will push the rate higher in September.

Published on Tuesday, UK inflation data looks likely to show that rising producer prices are forcing manufacturers to raise their prices, while retailers are no longer able to absorb the rising costs of imported goods.

Anecdotal evidence of this was found last week in the British Retail Consortium's report on September like-for-like sales, which suggested the 1.9% growth that month was largely down to rising prices.

Analysts forecast a rise in CPI to 3% in September, rising 1 percentage point above the Bank of England's 2% target rate. A further 0.1 percentage point would require governor Mark Carney to write a letter of explanation to the chancellor of the exchequer. UK prices are rising due to the weaker pound and wage growth is failing to keep pace: Shutterstock

"Our central case is that the letter will have to be written after the next inflation print rather than this one," says Sam Hill, senior UK economist at RBC Capital Markets.

Consumer price rises alone, however, don't adequately portray how UK economic growth is slowly being drained of momentum by slowing household spending.

UK average earnings and unemployment

On Wednesday, the Office for National Statistics publishes its monthly labour market report for August.

While few expect any further significant moves lower in the unemployment rate – consensus is for the rate to remain at 4.3% as in July – signs of a boost to earnings would be highly welcome.

In July, average annual earnings rose by 2.1%, up from June's 1.9%. With CPI standing at 2.9%, this means real wages shrank by 0.8%.

With inflation set to stay noticeably above wage growth for at least the next few months, we suspect the consumer is unlikely to resume its position as a major growth driver
by James Smith, developed markets economist at ING

August's wage growth is not expected to move far. With many companies citing economic and political uncertainties linked to Brexit as reasons to keep a lid on costs, capital expenditure and wages are suffering a period of stagnation.

"With inflation set to stay noticeably above wage growth for at least the next few months, we suspect the consumer is unlikely to resume its position as a major growth driver," says James Smith, developed markets economist at ING.

China third-quarter gross domestic product (GDP)

China's GDP has expanded from its 6.7% low seen through much of 2016, but not by much. The nation's growth, at an annual rate of 6.9% in the second quarter, still appears stellar in comparison with most developed economies.




 The People's Bank of China has taken steps to rein in credit growth, which could come at the cost of growth: Wikimedia Commons

The People's Bank of China, however, is concerned that growth is coming at the price of dangerous levels of household debt. Indeed, the central bank has, in the past few months, taken measures to suppress household credit growth.

With credit growth slowing and officials trying to rein in financial risks, economic growth looks set to slow over the coming quarters
by Capital Economics

Most expect the annual rate of GDP growth to remain at 6.9%.

US industrial production

It's very likely that after August's hurricane-hit data showed a 0.9% fall in production, September's data will show a healthy rebound.

Most other metrics that were negatively affected by Harvey and Irma have since made a recovery, and industrial production is likely to follow suit.

The data, published by the Federal Reserve on Tuesday is expected to show 0.3% growth in production in September, while capacity utilisation, a measure of total usage of all tools and machines of production, is expected to have expanded to 77% from 76.1%.

The best of the rest

Two of the biggest US regional manufacturing surveys are published this week. The Empire State manufacturing survey of the New York Federal Reserve district, published on Monday, is expected to contract slightly, while the Philly Fed survey of manufacturing in the Philadelphia Fed district, published on Thursday, is also seen dipping.

Lots of housing data in the US this week too. Building permits and housing starts data are published on Wednesday, while existing home sales numbers are on Friday.

House prices data kick the week off in the UK, with the Rightmove house price index published late on Sunday night – available to the early birds first thing on Monday morning.

Retail sales data are published in the UK on Thursday and should make interesting reading in the context of the inflation data earlier in the week.

Eurozone CPI is out on Tuesday, along with the ZEW measure of German economic confidence.

Corporate results

In the US there are lots more earnings from banks this week, including quarterly number from Morgan Stanley on Tuesday and Bank of New York Mellon on Thursday.

Also, Charles Schwab and Netflix on Monday, Alcoa on Wednesday and GE on Friday.

the UK's thin crop this week includes housebuilder Bellway on Tuesday and household goods producer Unilever on Thursday.


