Consumer spending has recovered. Official figures on Thursday could show that although retail sales volumes dipped a little last month, they were around 0.9 per cent higher in the third quarter than the second. This reverses the weakness we saw earlier this year.
This strength, however, comes despite a fall in real wages. Wednesday’s figures are likely to show that wage growth is lower than it was a year ago, at around 2.1 per cent, while Tuesday’s numbers are expected to show CPI inflation running close to last month’s 2.9 per cent.
Instead, one source of spending growth is that more people are in work; Wednesday’s figures might show another drop in the unemployment rate, to 4.2 per cent – its lowest rate since 1975.
Another possibility is that consumers are anticipating a rise in real wages because CPI inflation will soon fall. Economists have long expected this to happen over the winter as last year’s rise in import prices drops out of the numbers. It’s not just the low level of wage growth that supports such a belief. Figures on Tuesday should show that producer output price inflation has stabilised this year at around 3.3 per cent, and that the level of input prices is lower than it was at the start of this year. This points to a lack of inflation pressures in the pipeline.
We do, however, have one massive long-standing problem – stagnant productivity. Next week’s figures are likely to show that total hours worked rose by around 0.4 per cent in the three months to August, much the same rate as GDP. This implies that the 10-year stagnation in productivity is continuing. While this remains the case, there’s little chance of a big rise in real wages.
Overseas, we should see good news. Official numbers on Tuesday should show that US industrial production bounced back in September after falling in August in part because of Hurricane Harvey. Surveys by the New York and Philadelphia Feds should corroborate this. They are likely to show rising output and high optimism.
We should also see increased optimism about the German economy. ZEW’s survey of financial professionals should show another rise on Tuesday.
Watch out also for two other things. On Tuesday, the US Treasury could report that foreigners have been net buyers of US equities in the last 12 months, indicating that sentiment towards the market has improved. This points to global equity returns being lower in the next 12 months than they have been in the last 12.
Also, UK figures could show that government borrowing so far this financial year is lower than it was last year. This might fuel talk of borrowing for 2017-18 undershooting the OBR’s forecast, but it’s too soon to believe this with any confidence.
