Preview of Main UK Economic Releases for the Week Commencing 9 April
The British Retail Consortium’s March report will offer important insights as to whether February’s disappointing drop in retail sales volumes was largely due to consumers taking a breather after Christmas and the clearance sales, or whether they have become significantly more cautious. If the UK economy is to build on an apparent return to growth in the first quarter, it needs consumers to keep spending at a reasonable pace.
RICS Housing Market Survey for March
The March housing market survey from the Royal Institution of Chartered Surveyors (out overnight Monday/Tuesday) could provide important insights into the underlying state of the housing market, following recent mixed news. The Halifax lender reported that house prices spiked 2.2% month-on-month (m/m) in March, while the Nationwide lender showed a drop of 1.0% m/m. In addition, the Bank of England revealed that mortgage approvals for house purchases fell to an eight-month low of 48,986 in February after climbing to a 25-month high of 57,899 in January.
It appears housing market developments have been distorted recently by a number of first-time buyers rushing to complete purchases ahead of the end of a stamp duty holiday on 24 March. This distortion is likely to again be reflected in the RICS survey, but it may nevertheless provide important information.
Of particular interest will be the number of buyer enquiries in March to see how they are developing now that the stamp duty concession has ended (although the concession did not end until 24 March, the fact that the end was approaching would have affected enquiries from first-time buyers earlier than that given the time it takes to make a house purchase).
Also of interest will be developments in the number of properties coming on to the market, given the possibility that a shortage of available properties could provide support to house prices.
Meanwhile, we expect the RICS survey to reveal that the balance of surveyors reporting that house prices rose over the previous three months was stable at -13% in March after rising to this level in February from -16% in January.
For now at least, we are maintaining the view that house prices are likely to drift lower over the coming months in the face of soft economic fundamentals and low consumer confidence. Specifically, we expect house prices to fall around 3% by the end of 2012. The housing market remains low compared with long-term norms. Although the economy likely returned to limited growth in the first quarter, the economic fundamentals still look far from rosy for the housing market with unemployment high and likely to rise further, earnings growth muted, debt levels high, and the outlook uncertain. In addition, credit conditions may well tighten, making it harder for many people to get a mortgage. The Bank of England reported in its March Quarterly Credit Conditions Survey that “overall availability of secured credit was expected to fall slightly in 2012 Q2.” It went on to state “consistent with the reduction in credit availability, lenders expected credit scoring criteria for granting loan applications to be tightened further in Q2.” Furthermore, some mortgage rates have risen recently due to lenders’ higher borrowing costs in wholesale markets and this could well weigh down on housing market activity.
As 2012 progresses the squeeze on consumers’ purchasing power should ease as inflation falls further, and this may help house prices to stabilize in the latter months of 2012 along with ongoing very low interest rates and hopefully a sustainable pickup in economic activity. Nevertheless, unemployment is likely to rise further and wage growth looks set to remain muted, so the overall environment will still be very tough for households. Furthermore, there is the danger that high oil prices will limit the drop in inflation.
British Retail Consortium Retail Sales Monitor for March
The British Retail Consortium (BRC) retail sales monitor for March (overnight Tuesday/Wednesday) will be of major interest to see if consumers returned to the shops after cutting spending in February. Given the importance of consumer spending to the economy, a decent BRC report would provide significant, further support to signs that the economy picked up in March. In contrast, a weak BRC report would fuel concern about the economy’s underlying softness.
Latest hard data from the Office for National Statistics show that retail sales volumes fell 0.8% m/m in February after rising 0.3% in January and 0.7% in December. The key question is was February’s sharp drop in retail sales significantly due to consumers taking a breather after decent, discount-fuelled spending over December and early January? Or was it a sign of a more fundamental consumer reluctance to spend in the face of still serious headwinds? Or was it a bit of both?
The Confederation of British Industry (CBI)’s distributive trades survey for March has already been released, which suggests consumers are cautious in their spending but are not totally reining it in. We suspect that the BRC survey will essentially give the same picture. Specifically, the CBI survey showed that the balance of retailers reporting that sales were up year-on-year (y/y) climbed to 0% in March from -2% in February and a 34-month low of -22% in January. Even so, this was still below the overall average of +3% for 2011 and substantially below the +42% average seen in the second half of 2010.
Developments in consumer spending are key to the economy’s ability to build on an apparent return to growth in the first quarter. The concern is that consumers still face challenging conditions overall that threaten to limit their spending in the near term at least.
On the positive side, consumer price inflation has fallen appreciably since peaking last September (from a three-year high of 5.2% to 3.4% in February) and unemployment is rising at a reduced rate overall.
Nevertheless, consumers’ purchasing power is still being squeezed appreciably—as despite falling consumer price inflation is currently running well ahead of earnings growth. Consumer price inflation of 3.4% in February compared with annual average earnings growth of just 0.7% in January (and 1.4% in the three months to January). On top of this, unemployment is high and still rising, debt levels are elevated, and consumers still have significant concerns over the outlook. Consumer confidence weakened in March, having been modestly firmer overall during the first two months of the year.
Hopefully, an ongoing retreat in inflation over the coming months will further dilute the squeeze on consumers, although worryingly inflation may well be stickier in the near term due to high oil prices. Even if consumer price inflation does fall appreciably, unemployment is likely to rise further, wage growth looks set to remain muted, and debt levels will still be high, so the overall environment will likely still be tough for consumers.
Trade Deficit in February
The total trade deficit (Thursday) is expected to have been essentially stable at GBP1.8 billion in February, after widening to this level in January from GBP1.2 billion in December (which had been the smallest deficit since April 2003). Even so, this would be appreciably below the 2011 average monthly deficit of GBP2.3 billion. Within this, the traded goods deficit is also seen little changed at GBP7.6 billion in February after widening to GBP7.5 billion in January from GBP7.2 billion in December. Again, this would be significantly below the 2011 average monthly deficit of GBP8.3 billion.
The January trade data were pretty decent, with a 4.4% rise in goods exports to non-EU countries boosting hopes that exports can make a decent contribution to growth over the coming months. A 0.8% dip in exports to the key Eurozone market is a reminder that events there will have a key role to play in how much exports can help the UK economy. Meanwhile, a 1.6% rise in UK imports of traded goods excluding oil in January could have been a sign of an improvement in domestic demand. This possibility was further suggested by the fact that import volumes of traded goods excluding oil and erratics rose 1.8% in January.
Nevertheless, concern persists that UK exports will be limited in the near term at least by muted global growth. Of particular concern to UK exporters is possible ongoing contraction in the Eurozone through the first half of 2012 following a GDP decline of 0.3% quarter-on-quarter (q/q) in the fourth quarter of 2011. It certainly looks like Eurozone GDP contracted in the first quarter of 2012.
Latest survey evidence on foreign orders is reasonably encouraging. The latest export orders balance of the CBI industrial trends survey is relatively decent, although it fell to -11% in March after jumping to a six-month high of -2% in February from -26% in January and -32% in December. Even so, the export orders balance was still well above its long-term average of -21%. Meanwhile, the export index of the latest purchasing managers’ survey for the manufacturing sector showed a modest rise in foreign orders in March after foreign demand contracted marginally for the first time in three months in February. The purchasing managers indicated that weakened orders from mainland Europe were countered in March by improved demand from Southeast Asia, Japan, and Africa.
Meanwhile, moderate domestic demand is likely to limit UK imports over the coming months, although import values are likely to be pushed up by recent higher oil prices.
Producer Prices in March
Producer price data (Friday) are forecast to show a continued moderation in the y/y inflation rate while also indicating that the recent spike in oil prices is posing an increasing threat to the retreat in inflation. Output prices are forecast to have risen 0.5% month-on-month in March after increases of 0.6% in February and 0.4% in January. Nevertheless, this would see the y/y increase retreat to a 26-month low of 3.5% in March from 4.1% in February and a near-three-year high of 6.3% in September 2011. Core output prices are forecast to have increased 0.3% m/m in March, after rising 0.5% in February and 0.3% in January. This would cause the y/y increase to edge down to 2.8% in March after spiking to 3.0% in February from a 23-month low of 2.4% in January. This is down from a 13-month high of 3.7% in September.
Meanwhile, the consensus forecast is for producer input prices to have risen 1.2% m/m in March after spiking 2.1% in February, primarily because of higher crude oil prices. Nevertheless, this would still see the y/y increase in input prices fall to 4.7% in March, after rising to 7.3% in February from a 26-month low of 6.6% in January. This is down from a peak of 18.5% in July 2011.
The recent rise in input prices primarily resulting from higher crude oil prices is exerting increasing pressure on manufacturers to raise their prices to protect their margins. At the same time, though, manufacturers face an ongoing need to price competitively to try to gain, or even retain, business in a still-challenging environment.
By Howard Archer
10 Apr - RICS House Price Balance, March: -13
11 Apr - British Retail Consortium Monitor Total Sales, March (Year-on-Year): not forecast
11 Apr - British Retail Consortium Monitor Like-for-Like Sales, March (Year-on-Year): not forecast
12 Apr - Non-EU Visible Trade Balance, February (GBP/Month): -3.8
12 Apr - Visible Trade Balance, February (GBP/Month): -7.6
12 Apr - Total Trade Balance, February (GBP/Month): -1.8
13 Apr - Producer Price Input Inflation, March (Month-on-Month): not forecast
13 Apr - Producer Price Input Inflation, March (Year-on-Year): not forecast
13 Apr - Producer Price Output Inflation, March (Month-on-Month): +0.5%
13 Apr - Producer Price Output Inflation, March (Year-on-Year): +3.5%
13 Apr - Core Producer Price Output Inflation (ex Food, Tobacco etc.) March (Month-on-Month): +0.3%
13 Apr - Core Producer Price Output Inflation (ex Food, Tobacco etc.) March (Month-on-Month): +2.8%
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