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Next week's economics: 13-17 Jan

The UK is on the brink of recession, but inflation is low, next week's figures should tell us
January 9, 2020

The UK is on the brink of recession. On Monday, the ONS is likely to say that GDP was little changed in November, implying that it didn’t grow at all in the last three months compared with the previous three, and that economic activity hasn’t grown since February.

This might not, however, be a harbinger of disaster. One reason for such weakness is that companies put projects on ice last year because of Brexit uncertainty. With this now partially resolved, we might see a few of these being implemented soon.

Also, another reason for the stagnation is that the eurozone economy did badly in 2019, hitting UK exports: Monday’s data will show that net trade subtracted from UK growth in the last three months. Here too, though, there is reason for optimism. Official figures could show that eurozone industrial production rose in November, suggesting the decline is now almost over. And the ZEW survey of finance professionals could show that optimism has risen to a two-year high.

One advantage of the weak economy is that it has helped reduce inflation. Wednesday’s figures could show that consumer price index (CPI) inflation fell to 1.4 per cent last month, its lowest rate since November 2016. And with producer input prices falling, and manufacturers’ output price inflation at under 1 per cent, there is no sign of inflation in the pipeline.

It’s not just goods and services where inflation is low, however. It’s also low for house prices. The ONS could say on Wednesday that these rose only 0.6 per cent in the past 12 months, a seven-year low. And the RICS is likely to report that demand is still weak – although it might also tell us that estate agents expect a pick-up in prices this year as political uncertainty fades.

Inflation is also benign in the US. Wednesday’s figures are likely to show headline CPI inflation at just 2.2 per cent and the rate excluding food and energy at around 2.4 per cent. Although the latter is slightly higher than a year ago, the remarkable thing is how little inflation has risen given the low level of unemployment.

Other US figures will show that economic growth is slow but steady. Retail sales and industrial production should both post small rises, consistent with economists’ expectations that real GDP grew at an annualised rate of around 2 per cent in the final quarter. Surveys by the New York and Philadelphia Feds should show that companies expect such moderate growth to continue.

For investors, the most important numbers, however, will be the US Treasury’s data on capital flows. These are likely to show that foreigners have been big net sellers of US equities in the past 12 months. This is a sign of weak sentiment towards equities, and a good lead indicator of rising share prices over the next 12 months.