GDP in First-Quarter 2012 Headlines UK Economic Releases for the Week Commencing 23 April
There is serious concern that reported very weak construction output was a major drag on the economy and resulted in a second quarter of GDP contraction, thereby officially putting the economy back into recession. Although the Bank of England has heightened this risk, its members question the accuracy of the construction data, given that most other data and survey evidence point to a modestly expanding economy; it is especially hard to equate a 0.8% quarter-on-quarter increase in retail sales volumes in the first quarter and some recent signs of labour-market stabilization with an economy that is not growing.
GDP in First Quarter 2012
The key release by far during the week is Wednesday’s initial estimate of first-quarter 2012 GDP. The uncertainty surrounding this release stems from the performance of the construction sector, which has become a real wild card in the GDP hand. The recent construction data is so bad that it prompted a warning from the Bank of England that GDP possibly could have contracted again in the first quarter of 2012, thereby pushing the United Kingdom back into recession, given that GDP contracted 0.3% quarter-on-quarter (q/q) in the fourth quarter of 2011.
The initial estimate of GDP in the first quarter of 2012 is based on the output side of the economy. The general expectation has been that GDP saw modest growth in the first quarter of 2012, which would mean that the economy avoided a “double-dip” recession.
We have pencilled in overall GDP growth of 0.2% q/q in the first quarter, which would result in year-on-year (y/y) growth of 0.4%. Looking at the economy based on all of the data and survey evidence available so far for the first quarter, we believe that the economy picked up in January following the contraction in the fourth quarter of 2011, suffered a dip in February, but then improved anew in March. Furthermore, the latest news on the labour market points more to an economy growing modestly rather than contracting.
Nevertheless, we are far from confident in this forecast, given that the Office for National Statistics (ONS) has reported overall very weak construction output during January and February, which threatens to significantly drag down the overall first-quarter GDP performance even though the construction sector only accounts for 7.6% of the economy’s total output. Specifically, unadjusted data from the ONS show that construction output plunged 10.3% in December 2011 and 12.9% month-on-month (m/m) in January 2012 before growing 6.1% m/m in February (when it may have been held back by bad weather early in the month). Consequently, construction output was down 15.3% in the three months to February 2012 compared with the three months to November 2011.
There is considerable scepticism as to whether construction output really has been this weak, especially as the purchasing managers’ surveys for the construction sector were relatively healthy overall for the first quarter and pointed clearly to growth in the sector. Nevertheless, unless the ONS assumes that there was a surge in construction output in March or revises up the back data, construction activity will have been a major drag on GDP in the first quarter.
It is particularly notable that the Bank of England has expressed serious concern over the construction output data and their potential impact on the GDP figures. Specifically, the minutes of the April meeting of the bank’s Monetary Policy Committee reported that “The sharp falls in construction output in December and January were perplexing, and the Committee was minded not to place much weight on them, particularly given that other indicators of construction activity had suggested far more modest declines. The mechanical impact of the drop in construction output, together with the likely subsequent loss of activity around the Jubilee bank holiday, could lead the ONS to report further falls in GDP in both the first and second quarters of this year. But a wide range of survey indicators pointed to a moderate rate of growth in activity in the first half of the year and this was supported by official data on services output. Underlying aggregate activity growth was likely, if anything, to have picked up since the second half of 2011.”
Industrial production, which was essentially flat overall during the first quarter, hardly helped GDP growth. This was largely due to a surprisingly sharp dip in manufacturing output in February.
So if the economy did manage to grow in the first quarter, it will have needed a decent performance from the dominant services sector. Here, at least, the news is more encouraging. Specifically, latest available hard data from the ONS indicate that services output grew 0.2% m/m in January after increasing 0.3% in December. Furthermore, survey evidence from the purchasing managers indicate that services activity expanded overall in the first quarter at the fastest rate since the second quarter of 2010.
In reality, it does not make a huge difference whether the economy saw modest GDP growth in the first quarter or suffered modest contraction due to a sharp dip in construction output. In fact, it is very possible that a modest GDP drop in the first quarter could be initially reported, and then the data revised later this year to show that modest growth actually occurred if construction-sector performance is reassessed.
However, in terms of confidence, it would be much better if the GDP data do show that the economy returned to modest growth in the first quarter as this will avoid the many headlines that would undoubtedly appear proclaiming that the United Kingdom has slipped back into recession.
Whether or not the economy grew in the first quarter of 2012, it still faces serious domestic and international headwinds, so it could be vulnerable to relapses over the next few months at least. These headwinds notably include still markedly squeezed consumer purchasing power, elevated unemployment, a reluctance of businesses to invest amid worrying and uncertain circumstances, tighter credit conditions, reduced public spending and investment, and muted global economic activity (particularly in the Eurozone).
Elevated oil prices are currently reinforcing the headwinds facing the UK economy as they are causing inflation to be sticky around 3.5% (after it had fallen to this level from a peak of 5.2% in September 2011), thereby maintaining an appreciable squeeze on consumers’ purchasing power. Elevated oil prices are also squeezing companies’ margins, thereby threatening to hold back their investment and, possibly, employment plans.
There is also the likelihood that growth in the second quarter will be held back by the extra public holiday for the Queen’s Diamond Jubilee. Overall, we see GDP growth limited to 0.1% in the second quarter.
We expect sustainable modest growth to finally develop from the second half of 2012, supported by the reduced squeeze on consumers’ purchasing power coming from lower inflation (assuming that oil prices come off their recent highs), gradually improving global growth, and ongoing ultra-accommodative monetary policy. This backdrop should increasingly encourage businesses to invest, hopefully helped by an easing of credit conditions.
Overall, we expect the economy to grow 0.7% in 2012.
Public Finances in March
The public finances data for March (out Tuesday) are expected to show modest improvement compared with a year earlier following the disappointing outturn for February. Specifically, we forecast there to have been a Public Sector Net Borrowing Requirement (PSNBR) excluding financial interventions of GBP16 billion in March, which would be down from GBP18 billion in March 2011. This would mean the PSNBR amounted to GBP126.0 billion overall in fiscal year 2011/12, in line with the estimate given in last month’s budget and down from a shortfall of GBP136.8 billion in 2010/11.
Part of the improvement in the March public finances data is expected to be the result of a correction after surprisingly poor February data. There should also be some benefit from the fiscal consolidation measures that increasingly kicked in during the year. However, recent weakened economic activity is likely to have limited the improvement while tax revenues were already being lifted in March 2011 by the value-added-tax rate being increased from 17.5% to 20.0%.
In March’s budget, the Chancellor set the target of reducing the PSNBR modestly further to GBP120 billion in FY 2012/13, with the reduction limited by anticipated GDP expansion of just 0.8% in 2012 before it improves to 2.0% in 2013. This looks achievable (although we forecast GDP growth to be modestly lower at 1.6% in 2013). However, the Chancellor could very well struggle to meet his longer-term fiscal targets as he is relying on GDP growth picking up to 2.7% in 2014 and 3.0% in both 2015 and 2016, which currently looks rather optimistic.
CBI Distributive Trades Survey for April
The Confederation of British Industry (CBI)'s distributive trades' survey for April (Thursday) will provide the first indication as to how consumers started off the first quarter. Weekly sales data from the John Lewis department stores for the first half of April were encouragingly robust, although bear in mind that while John Lewis has often been seen as a bellwether for the state of consumer spending, it has been very much an out-performer in recent times.
We expect the CBI survey to show that the balance of retailers reporting that sales were up y/y was stable at 0% in April, having risen to this level in March from -2% in February and a 34-month low of -22% in January. This would still be just below the overall average of +3% in 2011 and substantially below the +42% average seen in the second half of 2010.
While the latest news on retail sales is largely encouraging, the fact remains that there is currently still a lot of pressure on consumers, so they will likely be cautious overall in their spending over the next few months at least. With consumer price inflation proving sticky at 3.5% in March, annual earnings growth limited to 1.2% in February, and fiscal policy tight, the squeeze on purchasing power remains appreciable. Meanwhile, unemployment is still high and full-time employment is falling modestly, despite some recent signs of labour-market stabilization.
Hopefully, inflation will eventually fall back appreciably further and support consumer spending, but this may well be delayed until the second half of this year. Even if consumer price inflation does eventually fall back appreciably further, unemployment is likely to remain high and wage growth muted, so the overall environment will likely still be pretty tough for consumers.
CBI Industrial Trends Survey for April
We expect the CBI industrial trends survey for April (Wednesday) to indicate that manufacturing activity got off to a reasonable start to the second quarter. The latest hard data from the ONS somewhat surprisingly showed that manufacturing output fell 0.8% m/m in February, although it still edged up by 0.2% in the three months to February compared with the three months to November. It is possible that manufacturing output was hit by very bad weather early in February, and it is notable that survey evidence largely pointed to modest manufacturing expansion during the first quarter.
Specifically, we forecast the balance of manufacturers reporting that their orders are at normal levels to have risen modestly to -5% in April after dipping to -8% in March from a six-month high of -3% in February. This would compare to a long-term average of -17% for the balance.
We also expect the April CBI survey to reveal that manufacturers generally expect to increase production over the next three months. In March, 24% of companies expected to raise output over the next three months. This was a 12-month high and up from 15% in February.
While we suspect that the manufacturing sector is in better shape than was indicated by February’s sharp dip in output, it nevertheless clearly faces a challenging environment. Domestic demand for manufactured goods is handicapped by a still-appreciable squeeze on consumers’ purchasing power as well as by tighter public spending. Meanwhile, muted economic activity in the Eurozone is limiting export orders, although this is being countered by recently improved demand Southeast Asia, Japan, and Africa according to the purchasing managers. In addition, the current spike up in input costs centred on higher oil prices is bad news for manufacturers as it squeezing their margins and exerting pressure on them to raise prices at a time when demand is still fragile.
Consumer Confidence in April
The GfK/NOP consumer confidence index (overnight Thursday/Friday) is forecast to show that sentiment stabilized in April after suffering a disappointing relapse in March, but remains down at historically very weak levels. Specifically, we expect the GfK NOP consumer confidence index (which is carried out on behalf of the European Commission) to have remained at -31 in April after falling back to this level in March from -29 in both February and January, which had been the highest level since mid-2011 and up from a 34-month low of -33 in December. Even in February and January, though, confidence had been very low compared to long-term norms given that the lifetime average of the survey’s balance is -8.
Consumer confidence was lifted at the start of 2012 primarily by an easing in pessimism over the economic outlook, but this ground to at least a temporary halt in March, when people also became markedly more worried about the outlook for their personal finances.
We expect consumer confidence to have gained some support in April from a renewed modest easing in concerns over the economic outlook and the jobs outlook. However, this is likely to have been countered by a generally negative view of the budget that was held in late March and by concern over record-high petrol prices.
House Prices in April
The Nationwide lender is expected to report during the week that house prices rose 0.2% m/m in April but were down 0.4% y/y. House prices on the Nationwide measure fell 1.0% m/m and 0.9% y/y in March after rising 0.4% m/m in February and dipping 0.3% m/m in both January and December.
There has been quite a bit of volatility in house prices recently from month to month and between surveys. Most notably, the 1.0% m/m drop in prices in March reported by the Nationwide measure contrasted with a 2.2% m/m increase reported by the Halifax. However, the Halifax had previously reported house price falls in five of the previous seven months and their data still showed house prices down by 0.6% y/y in the three months to March. It is evident that at least some of the latest volatility in house prices and recent overall modestly increased housing market activity has been due to first-time buyers looking to complete house purchases before a stamp-duty concession ended on 24 March.We currently expect house prices to drift lower over the coming months, to lose about 3% of their value by the end of 2012. Housing market activity is still low compared with long-term norms. Regardless of whether the economy returned to growth in first quarter, the economic fundamentals still look far from rosy for the housing market, with consumer confidence low, unemployment high and likely to rise further, earnings growth muted, debt levels high, and the growth outlook uncertain.
In addition, credit conditions may well tighten, making it hard for many people to get a mortgage. In fact, some mortgage rates have risen recently because of lenders’ higher borrowing costs in wholesale markets, and this could weigh down on housing market activity.
It is possible that house prices will be helped by a shortage of properties coming on to the market. The latest survey from the Royal Institution of Chartered Surveyors (RICS) indicated that the balance of surveyors reporting an increase in instructions to sell slipped back to +2% in March from +9% in February, although it was still a sixth successive positive balance. The RICS also reported that average stock per branch fell to 66.5 in March from 69.5 in February.
The squeeze on consumers’ purchasing power should eventually ease significantly further as inflation retreats (after being sticky in the near term due to high oil prices), and this may help house prices to stabilize later in 2012 along with ongoing very low interest rates and hopefully a sustainable acceleration in economic activity. Nevertheless, wage growth looks set to remain muted and unemployment could well rise further so the overall environment will still be very tough for house buyers.
By Howard Archer
24 Apr - Public Sector Net Borrowing Requirement, March (GBP/Bln): 16.0
25 Apr - GDP, First Quarter 2012 (Quarter-on-Quarter): +0.2%
25 Apr - GDP, First Quarter 2012 (Year-on-Year): +0.4%
25 Apr - CBI Industrial Trends, Total Orders, April: -5
26 Apr - CBI Distributive Trades Reported Volume of Sales, April: 0%
27 Apr - GfK Consumer Confidence, April: -31
During Week - Nationwide House Prices, April (Month-on-Month): +0.2%
During Week - Nationwide House Prices, April (Year-on-Year): -0.4%
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