The continued weakness in the pound belies the robust performance of the UK economy since last summer’s UK vote to leave the European Union.
Apart from a brief confidence shock the UK economy has proved exceedingly resilient with an expectation that it could well turn out to be the best performing G7 economy in 2016.
A large part of this outperformance has been as a result of the UK consumer carrying on regardless, while the lower pound has given a welcome boost to the manufacturing sector in terms of its export capability.
The inevitable downside to a lower pound is a rise in inflationary pressure and we have started to see some evidence of that in the last few months in the form of higher input costs, though the full effects of it still have some way to go before completely filtering down.
Higher oil prices have fed into higher fuel prices at the pumps while food price deflation does appear to be coming to an end; however this hasn’t thus far deterred consumer spending which last week translated into some decent results for a number of the UK’s big retailers.
This week is a big week for UK data, including inflation, wages, and unemployment and retail sales.
On Tuesday we’ll get the latest data on UK inflation in December and we’ve seen a significant turnaround in this regard over the past twelve months with UK CPI, hitting 1.2% in November a significant rise from the levels of -0.1% seen in November 2015. Retail prices came in at 2.5% excluding mortgages, but it is on the PPI numbers that will be the most closely monitored as a leading indicator for future CPI rises.
The numbers are expected to remain resilient with a particular focus on the PPI numbers which in November rose to 12.4%.
Wages data on Wednesday are also likely to play into the debate about the prospects of an income squeeze, with average weekly earnings showing a rise of 2.6% in the three months to November.
As long as unemployment stays at its current low levels of 4.8% then wages are likely to remain resilient and hopefully stay below levels of rising inflation.
We round the week off on Friday with December retail sales which given recent data from the British Retail Consortium is likely to stay at decent levels. On an annualised basis retail sales saw a rise of 6.6% in November rising at 0.5% on a monthly basis.
Another month of decent numbers will be particularly embarrassing for all of those who predicted a slowdown in the wake of the Brexit vote, and even more so for the Bank of England, who it appears are now rowing back on their recent negative narrative and sounding more upbeat on the UK economy.
This is a significant about turn and while the UK economy will probably show some signs of slowing in 2017, there appears little prospect of further easing of monetary policy in the coming months given central bank concerns about consumer credit growth.
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