Preview of Key U.K. Economic Releases for the Remaining Weeks of December

The Office for National Statistics (ONS) has recently reported that construction output expanded by 2.0% q/q in the third quarter rather than contracting by 1.1% q/q as shown in the current GDP data. Although the construction sector only accounts for 6.3% of national output, this substantial upward revision in itself will add 0.2 percentage point to q/q GDP in the third quarter. On the expenditure side of the economy, recently revised data have shown that business investment contracted by just 0.6% q/q in the third quarter rather than by 3.0% q/q, while the trade deficit was modestly smaller than previously reported during July–September.

The third-quarter decline in GDP has already been trimmed to 0.3% q/q from the 0.4% q/q drop first reported by the ONS. Right from the start, economists were amazed that GDP had contracted significantly further during July–August. Indeed, there had been universal expectations that the economy had returned to growth in the third quarter (IHS Global Insight had forecasted GDP growth to edge up by 0.1% q/q). While growth may well still prove to have been too optimistic an expectation, the revised data could show that the economy essentially stabilized.

Latest data and survey evidence suggest overall that the economy will finally return to growth in the fourth quarter, although it is still hardly racing ahead.

The current-account deficit (Tuesday) is forecasted to have narrowed to £8.5 billion in the third quarter from £11.4 billion in the second quarter, partly due to a reduced deficit in the total trade deficit and partly due to a modestly increased surplus in the net income account, which plunged to £1.4 billion in the second quarter from £7.0 billion in the first quarter.

Wednesday sees the release of the minutes of the December meeting of the Bank of England's Monetary Policy Committee (MPC). At the meeting, the MPC kept interest rates down at a record low of 0.50% and left the amount being spent on the quantitative easing program unchanged at £200 billion, having raised it by £25 billion at its November meeting. We expect the MPC to have voted 9–0 in favor of both decisions. With November's £25-billion extension in quantitative easing planned to last through early February, recent data revisions meaning that the economy now looks like it essentially stabilized in the third quarter, and growth likely to finally resume in the fourth quarter, there was little pressing need for the Bank of England to do anything more for now at least.

Also on Wednesday, the British Bankers' Association (BBA) is expected to report that mortgage approvals for house purchases extended their gradual upward march in November but remained well below long-term norms. We forecast mortgage approvals to have climbed to 43,500 in November, from 42,238 in October and a low of 18,262 in November 2008. Even so, this would still be substantially below the average monthly level of 60,574 seen since 1997.

Meanwhile, the Nationwide lender is forecasted to report during the week that house prices rose by 0.3% month-on-month (m/m) in December. While this would be an eighth successive month-on-month increase in house prices, it would be the smallest rise since April. Even so, it would cause the y/y increase in house prices to jump to 5.6% in December from 2.7% in November. This reflects the fact that house prices plunged by 2.5% m/m in December 2008.

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 unfavorable economic fundamentals. In particular, unemployment is high and likely to rise further in 2010 (despite the number of claimant-count jobless dipping in November) and earnings growth is low. Meanwhile, credit conditions are only easing gradually. In addition, house price/earnings ratios are currently moving up again because of the firming in house prices from their early-2009 lows. Furthermore, the threshold for having to pay stamp duty of 1% will move down again to properties costing £125,000 from £175,000 at the end of 2009.

We suspect that still relatively low housing market activity and still largely unfavorable economic fundamentals mean that the firming in housing prices seen since March/April will fizzle out before long and house prices will suffer a relapse in 2010. This is even more likely to occur if more properties come on 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 in recent months.

Bank of England data on 29 December are expected to reveal that housing market equity withdrawal amounted to -£6.5 billion in the third quarter of 2009. This would mark a sixth successive net injection of housing equity, albeit modestly less than £7.0 billion in the second quarter and a record £7.3-billion level in the first quarter. The marked overall fall in house prices from their peak 2007 levels has made equity withdrawal less attractive, while persistently tight credit conditions have made it generally more difficult to carry out the process. In addition, extremely low savings rates have made it appreciably more attractive for many people to use any spare funds that they have to reduce their mortgages rather than save them.

By Howard Archer

22 Dec - GDP, Third-Quarter 2009 (Quarter-on-Quarter): -0.1%
22 Dec - GDP, Third-Quarter 2009 (Year-on-Year): -4.9%
22 Dec - Current Account, Third-Quarter 2009 (GBP/Billion): -8.5
23 Dec - BBA Loans for House Purchases, November (000s): 43.5
23 Dec - Bank of England MPC interest-rate vote split, December (Hike-Unchanged-Cut): 0-9-0
23 Dec - Bank of England Monetary Policy Committee Quantitative Easing vote split, December (More-Unchanged-Reduced): 0-9-0
29 Dec - Housing Equity Withdrawal, Second-Quarter 2009 (GBP/Billion): -6.5
During Week - Nationwide House Prices, December (Month-on-Month): +0.3%
During Week - Nationwide House Prices, December (Year-on-Year): +5.6%