UK government surplus misses forecasts

Chris Scicluna
Emily Nicol

Measures of underlying Japanese inflation mixed but suggest slightly broader (albeit only moderate) price pressures
Data released at the end of last week showed that Japanese consumer price inflation took a larger than expected step down in January and remained extremely weak compared with other major economies – the headline rate fell to a three-month low of 0.5%Y/Y, while the internationally comparable core CPI (excluding all food and energy) slumped to -1.9%Y/Y, a series low. Of course, the weakness in part reflects special factors relating to previous government policy initiatives – base effects associated with cuts in mobile phone tariffs last April continue to knock 1½ppts off headline CPI, while effects related to the timing of ‘go to travel’ subsidies, which dropped out of the annual calculation at the start of the year, subtracted a further 0.4ppt in January. But, on the whole, today’s data from the BoJ illustrated the moderate pickup in underlying price pressures over recent months. Admittedly, the 10% trimmed mean CPI eased slightly in January, but the decline was modest to leave this measure of inflation at 0.8%Y/Y, just shy of December’s 7½-year high. Moreover, the share of items in the CPI basket with prices increasing rose in January to 61.5%, the most since the pandemic and the second-highest since August 2016, suggesting further broadening of price pressures.

Nevertheless, today’s services producer price inflation figures suggested that price pressures remain relatively subdued further up the supply chain. Indeed, producer prices in the sector fell 0.5%M/M in January, the most for a year. This saw the annual rate of inflation tick slightly higher, by 0.1ppt to 1.2%Y/Y. But excluding international transportation costs, services PPI remained more subdued at 0.9%Y/Y. And if the detail of yesterday’s flash PMIs are to be believed, firms in both the manufacturing and services sectors were less inclined to pass on rising input cost burdens to consumers.

UK government surplus misses forecasts in January, but cumulative borrowing in FY21/22 continues to undershoot expectations; CBI industrial survey and Ramsden speech to come
The UK’s public finances were not quite as strong as expected in January, with a monthly net surplus (excluding public sector banks) of £2.9bn, about £0.6bn shy of the OBR’s forecast. It was also £7.0bn smaller than the surplus in January 2020 ahead of the pandemic, but still marked a drop in net borrowing of £5.4bn from a year earlier. Compared to that benchmark of a year earlier, the improvement entirely reflects developments on the revenue side, with central government receipts up £8.6bn Y/Y thanks not least to the rebound in economic activity and recovery in the labour market. In contrast, central government expenditure is up about £0.5bn Y/Y. Cumulative public sector net borrowing excluding the public sector banks (PSNB ex) reached £138.5bn in the financial year-to-January, representing the second-highest level for the period on the series albeit a little less than half of the same period during the first year of the pandemic. And it was some £17.7bn (about 0.8% of GDP) less than forecast by the OBR, suggesting some scope for a modest relaxation of the fiscal stance in the spring statement on 23 March to take the edge off the planned increase in national insurance contributions for certain groups, and most likely, more substantive tax cuts ahead of the next general election, currently scheduled for May 2024.

The latest UK CBI industrial trends survey results are due later this morning and are likely to tally with yesterdays’ flash UK PMIs, which signalled the strongest growth in the manufacturing sector in seven months amid an easing of supply bottlenecks. BoE Deputy Governor Dave Ramsden – who voted for a hike in Bank Rate of 50bps last month – will speak publicly.

Germany ifo survey to signal more positive growth momentum in February; final Italian CPI data for January also due
The flow of euro area economic sentiment survey results continues today, with the German ifo business climate indices for February due. Consistent with yesterday’s flash PMIs, the ifo survey is highly likely to point to a pickup in economic growth momentum. Admittedly, the current assessment balance is expected to have edged only slightly higher (by 0.4pt to 96.5). But the expectations index is expected to rise to a five-month high (up 1pt to 96.1). At the sectoral level, expectations in services should be significantly improved with those in manufacturing steady. Also due today are Italian final CPI numbers for January, which are expected to confirm the flash data which showed that the EU-harmonised measure of inflation accelerated 1.1ppts to a high of 5.3%Y/Y in January, due principally to an extremely steep jump in household energy bills (regulated energy prices rose 93.5%Y/Y).

US dataflow gets underway with focus on consumer confidence and house prices; Bostic to speak publicly
The week’s US dataflow gets underway today with the Conference Board’s consumer survey for February, which – as suggested in the preliminary University of Michigan survey results – is expected to report a deterioration in sentiment due not least to concerns about high inflation and weaker equity markets. The flash US PMIs and Richmond Fed manufacturing survey indices, both for February, are also due, along with FHFA and S&P CoreLogic Case Shiller house price data. Atlanta Fed President Bostic will speak publicly.

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