Five things to look out for in the economy this week

The imminent election in Germany is key this week. Although Angela Merkel will surely remain Chancellor, the question is about the coalition she forms. In the UK, we're focusing on Theresa May's speech on Friday on her vision for our relationship with the EU

The German elections on Sunday could mean more freedom in formulating an economics-friendly approach to Brexit (Reuters)

This will be a week when the most important thing happens at the end of it – the elections in Germany on Sunday. This issue will not be who will be the Chancellor, for it would be astounding were Angela Merkel not to get her fourth term of office. The issue will be the nature of the coalition: how well the Christian Democrat vote holds up of course, but in particular whether the Free Democrats, their traditional coalition partners, recover from their disaster at the last elections. That would be the ideal outcome from a UK perspective, for it would give Angela Merkel, along with Emmanuel Macron in France, more freedom in formulating an economics-friendly approach to Brexit.

Theresa May will set out a British vision of relations with Europe in her speech in Florence on Friday. But what the UK wants matters much less than what Europe wants. It is in the self-interest of both sides that there should be a close and cooperative relationship between the UK and Europe. To build that relationship, both sides need to work at it. But if there is strong and self-confident leadership in Berlin and Paris it will be much easier to build that than it would were those two key counties on the continent uncertain and divided. Indeed, on a long view, leadership there will be more important than leadership – whoever provides it – in London. The next round of Brexit talks start in a week’s time.

On the UK economic front there are two things to look for. There is one specific bit of financial data this week, the public finances for August, out on Thursday. We are now five months into the financial year, with another two to go before the Budget is unveiled on 22 November. That is enough to provide a sense of whether there really will be any room for easing policy (student fees?) next year. Present expectations are for the five-month deficit to be around £30bn, roughly on course for an overall deficit of just under £60bn for the year as a whole. If revenues remain reasonably strong, that is fine. If there is any weakening there is a problem.

The other thing is how sterling holds up after its jump last week. The pound is now at its highest level against the dollar since the Brexit vote. Some slither back would be normal after any sudden rise, but if the pound continues to climb then a lot of the calculations made by businesses – for example on export revenues – need to be rethought.

Finally the US: the Federal Reserve’s policy committee meets this week and will make a statement on Wednesday. There will be a press conference to discuss this. The new information will be the Fed’s economic and financial projections through to 2020, which of course will be the next presidential election year. This will be a first cut, therefore, of the economic backcloth to that election. Has “Trumponomics” worked? Don’t expect fireworks, but let’s see what the Fed thinks.