Steven Andrew takes a look at the week’s key economic developments – high-street sales, Brown’s pre-Budget statement and European inflation
After displaying a profound weakness over the past four months, negative UK economic newsflow has abated somewhat, providing some reassurance that the personal sector is undergoing a slowdown rather than a collapse.
The CBI Distributive Trades survey for November reported a rise in the headline sales balance to 19 from 11. This was the second consecutive gain after a string of disappointing reports from the CBI (and BRC) which had suggested high-street spending was drying up altogether. The Footfall index – and official spending data – continue to contradict such a notion. Certainly, it remains the strong likelihood that a trend deceleration is underway. We remain confident that the relationship between real policy tightening and consumption which has held in the past will continue to exert itself in this cycle, extending the spending slowdown over the first half of 2005.
Buoyant Brown
So close to a General Election (probably next May) anything other than over-optimism from Chancellor Gordon Brown in his pre-Budget report would have been a surprise. The already narrow margin between passing or failing the Golden Rule is now a bit narrower (around £8 billion from £11 billion). The time for both spending cuts and tax hikes is likely to be after the 2005 General Election.
For now, and in typical fashion, the Chancellor lauded the achievements of the government in presiding over the “longest period of uninterrupted growth for the industrial history of our country”. The Treasury’s growth forecasts remain unchanged, at 3 to 3.5 per cent for 2005, considerably more optimistic than the market consensus (2.5 per cent). Clearly, there is a risk of a significant disappointment to revenues over the coming year.
Euro inflation
Euroland domestic growth signals are still only just visible and therefore the sense of vulnerability to fading external demand is growing by the month. At the European Central Bank’s (ECB) last monthly press conference there was the usual ‘hawkish’ nod to inflation but the extent of genuine ECB concern about the outlook is likely to be minimal.
Indeed, despite the fact that the first line of the ECB’s press statement describes Euro Area inflation as ‘worrisome’, it goes on to assert that any near-term rise should be temporary. Moreover, President Trichet commented that it was the ‘large consensus’ opinion of the Governing Council that Euro interest rates were appropriate.
On the euro’s appreciation, Trichet said relatively little, merely confirming that the ECB viewed recent moves as ‘unwelcome’, adding that “verbal discipline in the present time is really of the essence”.
Steven Andrew is an economist at F&C Asset Management plc
