Economists expect the Bank of England to raise interest rates again on Thursday, pushing the Bank rate up 0.25 percentage points to 0.5 per cent. The move will be a response not just to high inflation, but to hopes that the economy will grow strongly this year as fears about Covid recede.
Data in the week, however, might not wholly support such hopes. Purchasing managers’ surveys should confirm that manufacturing output is growing well thanks in part to an easing of supply constraints. But they’ll also show that services are growing only slowly thanks in part to Omicron reducing demand and adding to staff absences.
Other data will also be ambiguous. The Bank is likely to say on Tuesday that consumer borrowing is rising and the growth in households’ bank deposits is slowing. But is this because consumer confidence is rising, or because incomes are being squeezed? Similarly, it will report that companies are building up cash and paying off debt. But is this a sign of healthy cashflow, or of a reluctance to invest and expand?
Bank data could also show that mortgage approvals are slowing. With mortgage rates rising, this slowdown might continue this year: house prices are supported by a lack of supply rather than strong demand.
The European Central Bank is unlikely to match the Bank of England’s move despite rising inflation: Wednesday’s data could see the headline rate of CPI inflation rise above 5 per cent, with the rate excluding food and energy hitting three per cent, its highest since the euro was created.
The ECB is unlikely to respond to this because it is nervous about the state of the economy. Data in the week will give mixed signals here. Monday’s figures could show that real GDP grew only modestly in the fourth quarter, in part because shortages of materials held back industrial production. Thursday’s numbers could show that retail sales were weak in December, albeit after a good November. And purchasing managers should report that whilst manufacturing activity is growing as supply constraints ease, fears about Omicron are holding back the services sector.
The US economy, however, is doing well. Tuesday’s ISM survey should report not only expanding activity – albeit slightly less so than in recent months – but also an easing of supply constraints and price pressures. And Friday’s numbers should show a net rise of around 300,000 jobs in January and fall in the unemployment rate.
That rate will, however, remain above its pre-pandemic low of 3.5 per cent. More strikingly, the ratio of employment to population is likely to be well below its pre-pandemic level and even further below its 1999 peak. On this measure, the US is a long way from full employment.
