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Next week's economics: 20-24 Jan

A recovery in the eurozone and fall in political uncertainty could boost the UK economy, next week's figures might say
January 16, 2020

Has the reduction in political uncertainty led to an increase in business optimism and investment intentions? We’ll find out next week in the CBI’s survey of manufacturers.

Any upturn in these is, however, likely to be weak. This is partly because Brexit uncertainty hasn’t disappeared: post-2020 trading rules with the EU are yet to be agreed. But it’s also because there are still many obstacles to increased capital spending.

Friday’s news will reveal one of these. Flash purchasing managers’ surveys are likely to show that demand is still weak, with both manufacturing and services activity flat or falling. Why should companies invest if existing capacity is sufficient to meet demand?

Tuesday’s labour market figures, meanwhile, are likely to show that the unemployment rate has levelled off at around 3.8 per cent – or just under 1.3m. Overall hours worked, however, might have risen in the three months to November, implying a drop in productivity. Both developments might in part be effects of policy uncertainty. This has stopped some companies from hiring and also stopped others from firing, for fear they might have to rehire if activity does increase in the new year.

But low unemployment has not increased wage inflation. In fact, this might have fallen to just over 3 per cent in the three months to November; in July it was 3.9 per cent. This partly reflects weak productivity: if we’re not producing more, we can’t earn more. But it also reflects the fact that there’s more excess supply of labour than headline unemployment numbers suggest.

In the eurozone, meanwhile, we could get some good news. Purchasing managers might report that the pace of decline in manufacturing activity has slowed, and that the service sector is growing, perhaps at a five-month high rate. Germany’s Ifo index might hit a seven-month high, with companies’ assessment of current trading conditions and (more so) expectations both improving. And the National Bank of Belgium’s index of business confidence could hit an eight-month high. All this would be consistent with the message of the pick-up in narrow month growth (which has been a great lead indicator in the past), which points to an economic recovery this year. 

We’ll see in Thursday’s press conference what the ECB makes of all this. It is likely to say that it expects the economic upturn to raise inflation – although it has for years over-predicted inflation. It should also, though, say that it will not raise interest rates until inflation has risen – which might take some time.