Preview of Key UK Economic Releases the Week Commencing 27 February
Unexpectedly robust retail sales growth in January has fuelled hopes that the consumer may prove more resilient than expected and help the economy achieve a sustainable return to growth after GDP contracted 0.2% quarter-on-quarter in the fourth quarter of 2011. The Confederation of British Industry’s distributive trades’ survey for February and the GfK/NOP consumer confidence indicator will provide significant clues as to whether the consumer is genuinely perking up or whether January’s robust sales were primarily driven by people looking to take advantage of the clearance sales and they are still reluctant to spend significantly.
CBI Distributive Trades Survey for February
The Confederation of British Industry (CBI) distributive trades' survey for February (out on Tuesday) is expected to show improvement compared to January but be relatively soft compared to long-term norms. Specifically, we expect the CBI survey to show that the balance of retailers reporting that sales were up year-on-year (y/y) rose to -12% in February after relapsing to a 34-month low of -22% in January and having spiked up to a 7-month high of +9% in December. This would still be appreciably below the overall average of +3% in 2011 and +42% in the second half of 2010.
The CBI’s balance in January was totally at odds with the hard data from the Office for National Statistics, which showed retail sales volumes rising 0.9% month-on-month (m/m) after an increase of 0.6% in December. It is notable that the British Retail Consortium’s survey for January was also markedly softer than the ONS’s hard data, so there are significant doubts as to just how strong retail sales really were. The likelihood is that retail sales were lifted in January by consumers being particularly keen to take advantage of bargains in the clearance sales to purchase items they would otherwise struggle to make at the moment.
A key question for the economy is if the apparent strength of retail sales in January indicates that consumers have more life in them than previously thought, or was it primarily the consequence of bargain hunting in the sales. A decent CBI distributive survey for February would boost hopes of a resilient consumer, while a weak survey would fuel suspicion that consumers remain pretty reluctant to spend amid still-difficult circumstances.
While consumers appear to have more life in them than we thought, it remains hard to see them being anything other than careful in their spending over the next few months at least. Despite now falling back, consumer price inflation (3.6% in January) is currently running at double the rate of earnings growth, thereby continuing to squeeze purchasing power appreciably, while consumers are also having to contend with high and rising unemployment, elevated debt levels, and an extended fiscal squeeze. Consumer confidence is still very low compared to long-term norms despite recent improvement.
A further marked retreat in consumer price inflation over the coming months should increasingly ease the squeeze on consumers. Nevertheless, unemployment is likely to rise further, wage growth looks set to remain muted, tight fiscal policy will continue to bite, and debt levels will still be high, so the overall environment will likely still be tough for consumers. There is also a growing risk that higher oil prices will lead to inflation falling back less and more slowly than currently expected.
Consumer Confidence in February
The GfK/NOP consumer confidence index (out overnight Tuesday/Wednesday) is forecast to show that sentiment improved further to an eight-month high in February after spiking up in January from a 34-month low in December. Specifically, we expect the GfK NOP consumer confidence index (which is carried out on behalf of the European Commission) to have climbed to -27 in February after rising to -29 in January from -33 in December. In fact, the index was mired in the -30 to -33 range through the second half of 2011, which are among the lowest readings in the 38-year history of the survey and substantially below its long-term average of -8.
We expect consumer confidence to have been lifted in February by some recently improved data and survey evidence lifting hopes that the United Kingdom is returning to growth and will avoid recession. A further waning in inflation expectations may also have lifted sentiment. Consumer confidence was primarily lifted in January by a marked reduction in pessimism over the economic outlook, which was likely fuelled by waning inflation expectations resulting from recent heightened discounting by retailers and news that utility providers will trim their energy charges in February.
Nevertheless, the upside for consumer confidence is likely to be limited by a still-significant squeeze on consumer purchasing power, as the inflation rate is still double earnings growth. In addition, job insecurity and high debt levels remain a major concern for many people, while concerns and uncertainties over the economic situation and outlook have far from disappeared.
Mortgage Approvals in January and House Prices in February
The Bank of England is expected to report on Wednesday that mortgage approvals for house purchases climbed to a 25-month high of 55,000 in January from 52,939 in December. It is evident that mortgage approvals are being lifted by first-time buyers rushing to complete before the stamp duty concession ends in March.
Even so, mortgage approvals remain low compared to long-term norms. Mortgage approvals continue to be substantially below the average monthly level of 87,500 seen since 1993, while a level of 70,000-80,000 has in the past been considered consistent with stable house prices.
The Bank of England is also forecast to report that net mortgage lending amounted to £0.8 billion in January. This would match the December outturn but would again still be very low compared to long-term norms. Net mortgage lending is being limited both by muted housing market activity and (very likely) by a significant number of house owners looking to take advantage of their savings from low mortgage interest rates to reduce their outstanding mortgage levels and improve their personal balance sheets
Meanwhile, the Nationwide lender is expected to report during the week that house prices were flat m/m in February and up 0.3% y/y. House prices on the Nationwide measure fell 0.2% m/m in both January and December.
With housing market activity trending up modestly and the economy showing signs of improvement, some of the downside risks to house prices are abating; however, mortgage approvals are being lifted by first-time buyers rushing to complete before the stamp duty concession ends in March. While this may provide some support to house prices in the near term, it will be a temporary boost.
Despite the recent limited pick up, housing market activity is still low compared to long-term norms. Despite current signs of improvement, 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 tighten, making it harder to get a mortgage. These factors are countering extended very low interest rates.
For now we are sticking to our view that house prices are likely to drift down by around 5% in 2012, but we acknowledge there is a growing likelihood this may be too pessimistic a view, and house prices could essentially stagnate over the year. Much will depend on how resilient economic activity is over the coming months and how much unemployment rises.
Consumer Credit in January
The Bank of England is also expected to report on Wednesday that unsecured consumer credit was flat in January. There was a record net repayment of GBP377 million in December after relatively muted borrowing of GBP401 million in November. In December, there was a marginal net repayment of GBP16 million on credit cards following net borrowing of GBP17 million in November. In addition, there was a net repayment of GBP361 million in other loans and advances in December following net borrowing of GBP383 million in November.
Flat unsecured consumer credit in January is anticipated, as it is evident that consumers’ appetites for new taking on new borrowing is very low, while there is also a strong desire of many consumers to reduce their debt. Consumers’ desires to get a tight grip on their finances is clearly the consequence of still-serious concerns over the outlook for the economy and jobs.
Manufacturing Purchasing Managers’ Survey for February
The manufacturing purchasing managers' survey (PMI, out on Thursday) is expected to show that overall activity in the sector expanded in February at the fastest rate since April 2011. Specifically, we forecast the PMI to have improved to 52.4 in February after jumping to 52.1 in January from 49.7 in December and a low of 47.7 in October (which was the lowest level since June 2009). A reading of 52.8 would take the index further above the critical 50.0 level that indicates flat activity. The CBI has already released its industrial trends survey for February, which showed total orders picking up appreciably to a six-month high and near-term production expectations elevated.
Recent surveys and hard data indicate that manufacturing activity has picked up after suffering a torrid second half of 2011. Nevertheless, manufacturers still face a challenging environment and serious question marks remain as to whether the sector can sustain its improved performance in 2012. Domestic demand for manufactured goods still faces limitations stemming from consumers’ squeezed purchasing power, reduced public spending, and recently higher stock levels. Meanwhile, muted global economic activity—particularly in the Eurozone—remains a threat to manufacturers’ export orders, while the Eurozone crisis continues to be a source of major uncertainty for manufacturers. However, the purchasing managers’ survey indicated that export orders are being lifted by improved demand from Brazil, China, the Middle East, and the United States.
Construction Purchasing Managers’ Survey for February
We forecast the construction purchasing managers’ index (PMI, out on Friday) to have eased back further to a five-month low of 50.5 in February, after dipping to 51.4 in January from 53.2 in December. This would be only just above the 50.0 level that indicates flat activity.
It is likely that construction activity was hit to a limited extent in February by snow and freezing weather, although the disruption to activity was clearly nothing like that which was suffered in the fourth quarter of 2010. There is also conflicting evidence between the recent survey evidence and hard data as to whether construction activity is growing modestly or contracting modestly. The purchasing managers’ survey indicated the sector saw clear-but-limited growth in the fourth quarter of 2011, whereas hard data from the Office for National Statistics indicate that construction output contracted 0.5% quarter-on-quarter in the fourth quarter of last year.
Whether the construction sector is currently expanding modestly or contracting modestly, it undeniably faces an extremely challenging environment. In particular, the government’s spending cuts are limiting overall expenditure on public buildings, schools, and hospitals. On top of this, house-building activity is likely to be constrained by persistently weak housing market activity, soft prices, and a worrisome outlook. If the economy continues to struggle markedly over the coming months, there is the likelihood that construction activity will suffer increasingly from projects being put on hold or cancelled altogether.
There is some good news for the construction sector, as it stands to benefit from government measures to boost infrastructure that were outlined in last November’s Autumn Statement; however, it remains to be seen just how much of a boost these measures provide and how soon they will kick in. In addition, the government is looking to boost house building through instructing government departments to release state-owned land to be built on under a “Build Now, Pay Later” scheme. The government has also announced a GBO400-million ”Get Britain Building” investment fund aimed at reviving stalled house-building projects.
By Howard Archer
28 Feb - CBI Distributive Trades Reported Volume of Sales, February: -12%
29 Feb - GfK Consumer Confidence Index, January: -27
29 Feb - Bank of England Consumer Credit, January (GBP/Billion): 0.0
29 Feb - Bank of England Net Lending Secured on Dwellings, January (GBP/Billion): 0.8
29 Feb - Bank of England Number of Loan Approvals for House Purchase, January (000s): 55.0
1 Mar - Manufacturing Purchasing Managers Index, February: 52.4
2 Mar - Construction Purchasing Managers Index, February: 50.5
During Week - Nationwide House Prices, February (Month-on-Month): 0.0%
During Week - Nationwide House Prices, February (Year-on-Year): +0.3%
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