UK earnings revisions recover, inflation outlook improves

27th June 2011 by Simon Ward

UK statistics for April and May have been distorted by the royal wedding bank holiday, so have received limited coverage here. Purchasing managers’ surveys for June to be released over 1-5 July will be important in assessing the current state of the economy. One hopeful sign is that revisions to analysts’ forecasts for company earnings have been balanced over the last month, following net downgrades in May. The PMIs tend to correlate with earnings revisions – see first chart.

Last week’s public sector borrowing numbers evoked much gloom about fiscal prospects. The deficit in April and May combined was £1.5 billion higher than a year before but the comparison is distorted by the £3.5 billion bank payroll tax paid in April 2010. A six-month moving average of seasonally-adjusted borrowing continues to decline slowly – second chart. The recent rate of improvement, if sustained, implies full-year borrowing of £125-30 billion in 2011-12, above the OBR’s £122 billion forecast but down from £143.2 billion in 2010-11.

A previous post suggested that CPI inflation would undershoot the Bank of England’s mean prediction of a rise to 5.0% in the third and fourth quarters of 2011. This prospect has been strengthened by recent declines in wholesale energy prices, which should result in a significant fall in motor fuel costs – third chart – while tempering coming utility price rises. The fuel effect is likely to shave 0.2% from the CPI relative to its May level, based on an unleaded price of £1.30 per litre (motor fuel has an index weight of 4.3%).

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