The Consumer is the Focus of UK Economic Releases for the Week of 28 May
The consumer will be the focus of attention over the coming week. The danger is that already low and fragile consumer confidence will have taken a serious hit from a recessionary United Kingdom and from concern over how the UK economy could be affected by events in Greece.
CBI Distributive Trades Survey for May
The Confederation of British Industry (CBI) distributive trades' survey for May (out Tuesday) will hopefully show that retail sales picked up at least modestly after suffering a poor April. There was always going to be an appreciable correction in retail sales in April after the sharp jump in March, while the wet weather during April further dampened sales. If retail sales have not picked up to at least a limited extent in May, it will suggest that already muted underlying consumer spending has softened.
We expect the CBI survey to show that the balance of retailers reporting that sales were up year-on-year improved to +5% in May, after falling to -6% in April from 0% in March. This would be just above the overall average of +3% in 2011 but substantially below the +42% average seen in the second half of 2010. In the CBI’s April survey, retailers were relatively upbeat about near-term sales prospects, with a balance of +19% expecting sales to be up year-on-year in May. We suspect that this will have proved optimistic given the pressures bearing down on consumers’ confidence and ability to spend.
The fact is that consumers are facing major headwinds as well as worrying and uncertain times, so the likelihood is that they will be generally cautious overall in their spending over the next few months at least.
Retailers need all the help they can get, so they will be hoping that there is an extended spell of good weather to boost sales of summer clothes and outdoor goods, and that consumers also splash over the coming weeks, firstly on souvenirs and mementos relating to the Queen’s Diamond Jubilee, and then, to the Olympics.
Although consumer price inflation fell to a 26-month low of 3.0% in April, this is still well above annual earnings growth, so purchasing power continues to be squeezed appreciably. Annual earnings growth was limited to just 0.6% in the three months to March (and 0.1% in March itself) while tighter fiscal policy is also adding to the squeeze on some consumers. Meanwhile, unemployment is still high and full-time employment falling modestly, despite the recent better news on the labor market. It is also likely that already low and brittle consumer confidence is taking a serious hit from the news that the UK is back in recession, and this will lead to increased caution in spending. Heightened worries over the situation in Greece and how this could hit the UK economy are also likely to fuel consumer caution.
Hopefully, inflation will fall appreciably further and support consumer spending, but this looks like being a gradual process. 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.
Mortgage Approvals in April and House Prices in May
The Bank of England is expected to report on Wednesday that mortgage approvals for house purchases were little changed, at 49,500 in April, after edging up to 49,860 in March from an eight-month low of 49,029 in February. This would be well down on the 25-month high of 57,954 seen in January. Mortgage approvals are expected to have broadly stabilized at a lower level after being lifted towards the end of 2011 and early on in 2012 by first-time buyers looking to complete before a stamp-duty concession ended on 24 March.
Significantly, mortgage approvals are very low compared with long-term norms. Mortgage approvals have averaged 87,039 a month 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 GBP0.8 billion in April. This would be down from GBP1.0 billion in March and would again be very low compared with long-term norms.
Meanwhile, the Nationwide lender is expected to report during the week that house prices edged down by 0.2% month-on-month (m/m) in May. Latest data from the Nationwide show that house prices fell 0.2% m/m in April after a drop of 1.0% m/m in March. A 0.2% m/m drop in May would leave house prices down 1.4% year-on-year (y/y).
We maintain the view that house prices will trend gradually down over the coming months in the face of generally weak economic fundamentals and low consumer confidence. Specifically, we expect house prices to fall by around 3% by the end of 2012.
Housing market activity is very low compared with long-term norms. The economic fundamentals currently look worrying overall for the housing market with unemployment high, earnings growth muted, and the outlook highly uncertain and more than a little worrying. In addition, relatively tight credit conditions may well make it hard for many people to get a mortgage. 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.
The housing market may also be hit in the near term at least by heightened consumer concern over the economic outlook following the news that the UK is officially back in recession, with GDP contracting 0.3% quarter-on-quarter (q/q) in the first quarter. Serious worries over the situation in Greece and how this could hit the UK economy may well also lead to increased caution over buying a house and dampen prices.
Consumer Credit in April
The Bank of England is also expected to report on Wednesday that net unsecured consumer credit edged up by just GBP100 million in April. This would be down from GBP419 million in March, which was the highest level for six months. In March, there was a modest net borrowing of GBP203 million on credit cards after a modest net repayment of GBP60 million in February. In addition, there was a net increase of GBP216 million in other loans and advances in March, which was down from an increase of GBP345 million in February. While March saw the largest net rise in unsecured consumer credit since September 2011, it was down substantially on the average monthly level of GBP1.1 billion seen since 1993.
Consumer appetite for taking on new borrowing clearly remains limited while there is also an ongoing strong desire of many consumers to reduce their debt. Consumer desire to keep a tight grip on their finances reflects serious concerns over the outlook for the economy and jobs. It is very possible that increased worries over the outlook resulting from news that the economy is back in recession and from the situation in the Eurozone are intensifying the desire to improve personal finances.
Consumer Confidence in May
The GfK/NOP consumer confidence index (out overnight Wednesday/Thursday) is forecast to show that sentiment weakened in May to be at a 2012 low. In fact, confidence is seen matching last December’s lowest level since February 2009. Specifically, we expect the GfK NOP consumer confidence index (which is carried out on behalf of the European Commission) to have fallen to -33 in May from -31 in both April and March, and -29 in both February and January (which had been the highest level since mid-2011). This would be extremely low compared with long-term norms, given that the lifetime average of the survey’s balance is -8. In fact, it would be one of the lowest levels in the survey’s 38-year history.
Consumer confidence is expected to have softened in May, primarily because of increased pessimism over the current state and outlook for the UK economy following the news that GDP contracted in the first quarter. In addition, heightened concerns over the situation in Greece and how the UK could be harmed are seen weighing down on confidence. There is a very serious risk that consumer confidence may have fallen more than expected due to markedly increased concerns over the economic situation outlook, given renewed recession and the situation in Greece.
The overall drop in confidence is expected to have been limited by lower petrol prices in May, easing inflation concerns, and by recent resilient news on the jobs market.
Manufacturing Purchasing Managers’ Survey for May
The manufacturing purchasing managers' index (PMI; out Friday) is expected to show that overall activity in the sector essentially stagnated in May. Specifically, we forecast the PMI to have retreated to a 2012 low of 50.1, from 50.5 in April and 51.9 in March. This would be only fractionally above the critical 50.0 level that indicates flat activity.
The CBI has already released its industrial trends survey for May, which showed an appreciable loss of momentum in manufacturing activity, although the orders balance was still in line with its long-term average. The CBI survey indicated that a softening in both domestic and foreign demand occurred in May, leading to markedly reduced production expectations among manufacturers for the next three months.
Manufacturers are clearly currently facing serious challenges that are limiting their performance and near-term prospects. Eurozone economic weakness is weighing down appreciably on overall foreign demand for UK manufactured goods, although the CBI indicates that this is being partially offset by UK exporters “making inroads into high-growth markets.” In addition, exporters have had to cope with the pressure on their competitiveness coming from sterling hitting a 33-month on a trade-weighted basis in May.
Meanwhile, domestic demand for manufactured goods is handicapped by a still-appreciable squeeze on consumers’ purchasing power as well as by tighter public spending. In addition, recent higher input costs centered on elevated oil prices have squeezed manufacturers’ margins and exerted pressure on them to raise prices at a time when demand is fragile. At least oil prices have come well off their March highs.
By Howard Archer
29 May - CBI Distributive Trades Reported Volume of Sales, May: +5
30 May - Bank of England Consumer Credit, April (GBP/Billion): 0.1
30 May - Bank of England Net Lending Secured on Dwellings, April (GBP/Billion): 0.8
30 May - Bank of England Number of Loan Approvals for House Purchase, April (000s): 49.5
31 May - GfK Consumer Confidence, May: -33
1 Jun - Manufacturing Purchasing Managers Index, May: 50.1
During Week - Nationwide House Prices, May (Month-on-Month): -0.2%
During Week - Nationwide House Prices, May (Year-on-Year): -1.4%
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