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Next week's economics: Aug 2 - 6

Next week should bring some news of a continued economic upturn, but also signs of inflation.
Next week's economics: Aug 2 - 6

Next week should bring further signs of a global economic upturn, but also reasons for concern.

In the eurozone, final purchasing managers’ surveys should confirm the flash readings, which showed growth in the services sector to be at a 21-year high while the rate of expansion in manufacturing, whilst still strong, is slightly less impressive than in recent months.

In the UK final purchasing managers’ surveys should also confirm the flash readings, which showed that both growth in manufacturing and services has slowed recently due in part to staff shortages caused by the pandemic. A further survey should show that the construction sector is also expanding rapidly, thanks in part to increased housebuilding.

US data will also show a continued recovery. Monday’s ISM survey will show that the manufacturing sector is still growing strongly, albeit no more so than a few months ago. And Friday’s employment report should show that the economy created around 700,000 net new jobs in July, helping the unemployment rate drop to around 5.7 per cent.

Such good news, though, will be tempered by other readings. For one thing, official eurozone data won’t be so impressive. Retail sales in the region are likely to be little changed (though volatile) from autumn’s level. And official German data is likely to show that industrial production is only slightly above the autumn’s levels, and is some 10 per cent below its 2018 peak: it is easy to forget that the economy was faltering before the pandemic.

Also, China’s economy isn’t greatly sharing in the upturn: purchasing managers there could report that growth is only moderate.

And where the expansion is strong, it is generating inflation. The ISM survey will report sharply rising prices of materials and that shortages of parts and labour are hindering production. And UK purchasing managers will report big increases in prices of building materials.

The Bank of England, however, is relaxed about this. Thursday’s monetary policy announcement is likely to say that the Bank thinks that high inflation is only temporary. It should repeat its promise not to raise rates until it is confident the 2 per cent inflation target will be met “sustainably”. Markets interpret this to mean no rise until the middle of next year.

There’s one sector, however, where inflation is falling – the housing market. The Halifax is likely to say on Friday that house price inflation fell last month to a little over 8 per cent: it was 9.6 per cent in May. This is due to the fading effect of the stamp duty holiday and the waning of pent-up demand created by the lockdown. Most economists expect the inflation rate to continue falling in the next few months.