Overview of the week commencing 25 September
Graham Cross, CEO
Eyes have been on Germany this week. From a low of -6.8 in July 2016, the ZEW Indicator of Economic Sentiment has trended upward toward last week’s 17.0. Professor Achim Wambach, ZEW President, is of the opinion that ‘solid growth figures in the second quarter of 2017 in combination with a steep rise in bank lending and increasing investment activities by both the government and private firms are likely reasons for the financial market experts’ significantly more positive outlook’.
Luckily, ‘the German federal elections do not seem to have been a source of uncertainty’ and ‘worries about the recent strengthening of the euro [have], for now, also faded into the background’.
We are still reasonably optimistic about the immediate prospects for the German economy. Assuming, of course, that Angela Merkel’s Christian Democrats are able to form a stable coalition for government after what was a disappointing result for her yesterday.
Back in the UK, the Office for National Statistics reports a 1.0 percent rise in the quantity bought in the retail sales industry during August. In fact, the 12-months to August reveal a 2.4 percent gain, representing the 52nd consecutive monthly gain in the year-on-year rate. Both figures are in excess of what was expected.
In the event, food sales were broadly flat and the contribution from petrol sales fell, meaning that much of the growth in retail sales came from non-essential purchases. That leaves open the possibility that the fall in the pound has encouraged visitors from overseas to spend more but it also alludes to some resilience in broader demand. And that is a surprise. After all, comparatively high inflation coupled with low wage increases – characterising a ‘squeeze on living standards’ – implies weaker sales.
We have to accept that these figures add to the potential for a November rate rise. Mind you, we still regard a rate rise as unnecessary and we think it very unlikely that we will see anything more than a quarter point rise any time soon. But, if we are to see the Bank of England raise rates this year, it will most likely be in November so that the move coincides with the publication of the quarterly Inflation Report; thus allowing the Bank a greater opportunity to elaborate on their current mode of thought.
Before then, though, the September retail sales figures will be released. We guess that a surprise to the upside will strengthen the hawks’ case with a set of disappointing numbers handing the advantage to the doves.