Next week's economics: 11-15 Feb

The eurozone is in recession, next week's figures are likely to confirm. Economists expect official numbers on Thursday to show that real GDP in the region fell by 0.4 per cent in the fourth quarter, the third successive quarterly drop; many economists expect a fourth fall in the current quarter. Figures the previous day will show that the recession was especially severe in the industrial sector, where output probably fell by around 2.5 per cent in the fourth quarter.

However, we should get better news from the US. Retail sales (Wednesday) and industrial production (Friday) are both expected to post small rises, confirming economists' belief that the surprise fall in GDP in the fourth quarter was a temporary blip of no great concern. However, Friday's Empire State survey might cast a little doubt on this, as it could show that manufacturers in the New York area are reporting both weak activity and pessimism about future prospects.

In the UK, the main news will be Tuesday's inflation figures. These could show consumer price inflation close to last month's 2.7 per cent, as higher food price inflation offsets favourable moves elsewhere. Manufacturing price data the same day will suggest little inflation pressure "in the pipeline". They are likely to show output price inflation (excluding duties) running at less than 2 per cent, and input price inflation barely positive at all - and, in fact, that raw materials prices are significantly lower than they were in the spring. It's possible, though, that sterling's recent drop will raise these figures a little in coming months.

Inflation is, however, squeezing real incomes and consumer spending, as we'll see on Friday. It's possible that official figures will show that retail sales volumes fell in January - perhaps exacerbated by the snow - and fell in the last three months compared with the previous three.

On Wednesday, the Bank of England will give its latest assessment of the economy in its Inflation Report. It's likely to emphasise that the recovery will be weak and choppy, and that inflation will rise until the middle of this year but fall thereafter. The main issue that the report should address is: to what extent is the UK's problem one of deficient demand and to what extent is there a supply-side problem? The latter portends weak long-term growth and/or inflation; the former does not.

For investors, however, the most important news will be Friday's US capital flows numbers. In two of the last three months, these have shown big foreign buying of US equities, which is a sign of perhaps excessive confidence in stock markets. This matters, because such buying has been a great predictor of annual equity returns in the past. If we see further big buying, we should be cautious about the stock market's prospects in the next 12 months.

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