Next week's economics: 21-25 Jan

The UK could be back in recession. If Friday's official data confirm the expectations of the Office for Budget Responsibility and Bank of England, and the estimate of the NIESR, they'll show that real GDP fell slightly in the fourth quarter.

It is, of course, silly to put much weight upon whether the number is slightly positive or slightly negative, given that the figures are subject to revision. But other numbers next week are likely to confirm the weakness of the economy. The CBI is expected to say on Tuesday that manufacturers expect output to be flat over the next three months. And on Thursday it's likely to report only a small annual rise in nominal retail sales over the Christmas period.

This weakness is taking its toll on the public finances. Tuesday's numbers are likely to show that the deficit on the current budget - which is less affected by one-offs such as the transfer of the Royal Mail pension fund - was around £90bn in April-December, compared with £85.2bn in the same period on 2011.

However, Wednesday's numbers will remind us that the greatest puzzle in the economy continues - the resilience of labour demand in the face of economic stagnation. These could show that unemployment has fallen below 2.5m (7.7 per cent of the workforce), as jobs have been created despite stagnant activity. This means that labour productivity is still falling, to the bafflement of economists.

This demand for labour, though, is not putting up its price by much. Wage inflation is likely to be stuck at around 1.8 per cent, less than a year ago and less than the current inflation rate.

We should, however, get some better news from the eurozone. A slew of surveys - Germany's ZEW's on Tuesday, the National Bank of Belgium's on Wednesday, purchasing managers' on Thursday and Germany's Ifo on Friday - should all show a similar picture, of a slight improvement in economic conditions and expectations. This won't mean the region's recession is over, but it should corroborate economists' expectations of a recovery in the spring.

In the US, the main news will come from the housing market, where sales of both new and existing houses should continue their recent strong upward trend.

We'll see on Wednesday what the monetary policy committee makes of all this. The weakness of demand is likely to have caused members to consider yet more quantitative easing. But stubborn inflation, and the fear that falling productivity could add to inflation, would have stayed their hand.

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