Forthcoming U.K. Economic Data Releases Should Show Economy Finally Exited Recession in Fourth-quarter 2009

The first GDP estimate is based on the output side of the economy only - and the available evidence justify expectations for growth in the fourth quarter. Latest hard data show that output in the dominant services sector expanded for a second month running in October for the first time since February 2008, while the business activity index of the purchasing managers' survey for the services sector averaged 56.9 for the fourth quarter. While this survey appears to have been overstating the strength of the services sector in recent months, it is, nevertheless, the highest quarterly average since the third quarter of 2007 and substantially above the 50.0 level that is supposed to indicate unchanged activity.

In addition, industrial production expanded 0.4% month-on-month in November and even flat output in December would result in growth of 0.2% quarter-on-quarter in the fourth quarter. This would be the first quarterly expansion in industrial production since the fourth quarter of 2007. Given that the manufacturing survey evidence for December was relatively healthy and the Society of Motor Manufacturers have reported that car production surged 58.5% year-on-year in December, it is to be hoped that industrial production actually expanded by more 0.2% quarter-on-quarter. Meanwhile, construction output actually expanded in both the second and third quarters of 2009. While the sector is clearly still struggling to develop recovery, there is little reason to believe that it suffered a sharp relapse in the fourth quarter.

Although no details will be released on Tuesday on the expenditure side of the economy in the fourth quarter, it is worth noting that evidence here also points to growth. Consumer spending - which accounts for some 65% of GDP - is likely to have seen clear expansion despite retail sales volumes growing by a weaker-than-expected 0.3% month-on-month in December. In fact, retail sales volumes rose 0.7% quarter-on-quarter in the fourth quarter, while car sales were buoyant as they were lifted by the scrappage scheme. Meanwhile, it appears that consumer spending on services has firmed to a limited extent with the Bank of England's regional agents reporting in their January survey that consumer services turnover "appeared less weak" than earlier in 2009. Inventories seem likely to have made a decent contribution to GDP growth after being a major drag through the first three quarters of 2009 due to their being reduced at a much slower rate in the fourth quarter or even modestly rebuilt. Government spending and investment will also have been positive in the fourth quarter due to stimulus measures, while business investment is now seemingly been trimmed at a much-reduced rate compared to much of 2009. Exports will also hopefully have risen in the third quarter, lifted by the weak pound and firmer domestic demand in key overseas markets. This may well have been countered by increased imports, partly resulting from foreign cars being bought under the scrappage scheme. Indeed, net trade was negative in the third quarter.

The British Bankers' Association (BBA) is expected to report on Tuesday that mortgage approvals for house purchases extended their steady but relatively gradual upward trend in December, but remained well down on long-term norms. Mortgage approvals could have been lifted to a limited extent at the end of 2009 by buyers looking to beat the price threshold for stamp duty on house purchases moving back down to £125,000 in January. We forecast mortgage approvals to have climbed to a 26-month high of 46,000 in December from 44,713 in November, and a low of 17,725 in November 2008. Even so, this would still be substantially below the average monthly level of 60,479 seen since 1997.

Meanwhile, the Nationwide lender is forecast to report during the week that house prices rose 0.4% month-on-month in January. While this would be a ninth successive month-on-month increase in house prices, it would be the equal smallest rise with December since April 2009. Even so, it would cause the year-on-year increase in house prices to pick up to 7.5% in January from 5.6% in December. This reflects the fact that house prices fell 1.0% month-on-month in January 2009.

While housing market activity has been lifted to a limited extent by the significant fall in house prices from their 2007 peak levels and low mortgage interest rates, the upside continues to be limited by unfavourable economic fundamentals. In particular, unemployment is high and likely to rise further in 2010 (despite the dip in unemployment at the end of 2009) and earnings growth is low. Meanwhile, credit conditions are only easing gradually. In addition, house price/earnings ratios are currently moving back up due to the firming in house prices from their early-2009 lows. Furthermore, the threshold for having to pay stamp duty of 1% moved back down to properties costing £125,000 from £175,000 in January.

We suspect that still relatively low housing market activity and still largely unfavourable economic fundamentals means that house prices could suffer a relapse in 2010. This is even more likely to occur if more properties come on to the market as a result of the recent firming in prices, given that a shortage of properties has been a key factor supporting house prices since early-2009.

The GfK/NOP consumer confidence index (out overnight Thursday/Friday) is expected to have edged back up in January after suffering a significant relapse during December and November. Consumer confidence initially fell back appreciably in November after the surprising news that the economy continued to contract in the third quarter. Then confidence took a further hit in December as many consumers were concerned over measures announced in the Chancellor's Pre-Budget Report. We expect confidence to have risen modestly in January due to heightened belief that the economy is now growing again. Specifically, we expect the GfK NOP consumer confidence index to have edged up to -18 in January after retreating to -19 in December from a 21-month high of -13 in October. It had previously risen to October's peak from -37 back in January 2009. Confidence is still clearly brittle given that the long-term average for the consumer confidence index is -8.

The CBI's distributive trades survey for January (out on Wednesday) is forecast to show that the balance of retailers reporting that sales were up year-on-year fell back to +8% from +13% in December. Sales are expected to have been limited in January by the extremely bad weather hitting footfall while the Value-Added Tax hike from 15.0% to 17.5% may also have had a modest dampening impact. Even so, this would still be well above the balance's overall average of -12 for 2009. The suspicion remains that the upside for consumer spending will be limited in 2010 by a number of factors, most notably high unemployment, low earnings growth, the VAT hike, and a general desire/need for consumers to improve their personal finances

By Howard Archer