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GDP growth in the third quarter is not expected to be revised significantly from the surprisingly strong 1.0% quarter-on-quarter expansion currently reported. Recent data suggest it could be trimmed to 0.9% quarter-on-quarter. If the economy is to avoid a renewed GDP dip in the fourth quarter, it will likely need consumers to pick up their spending appreciably, so the hope has to be consumer confidence improved in November and that the Confederation of British Industry distributive trades survey is decent. The worry is consumers are now being pressurized by higher energy and food prices, while earnings growth slowed anew in September after trending up modestly from the lows seen earlier in 2012.
GDP growth in the third quarter
Tuesday sees the second estimate of GDP in the third quarter. The preliminary estimate indicated GDP bounced back by a stronger-than-expected 1.0% quarter-on-quarter (q/q) in the third quarter, which caused it to be flat year-on-year (y/y). This followed three quarters of q/q contraction in a 0.3–0.4% range.
We do not expect a major revision to the third-quarter GDP growth rate, although there is a risk that it could be trimmed to 0.9% q/q.
Third-quarter expansion of 1.0% q/q substantially outweighed the 0.4% q/q decline in GDP suffered in the second quarter, which suggested the economy had seen underlying modest growth overall during the spring and summer after allowing for the various distortions that affected GDP in the second and third quarters. GDP contraction of 0.4% q/q in the second quarter was clearly heavily influenced by the hit to activity coming from the extra day public holiday in June to celebrate the queen’s Diamond Jubilee and by very wet weather (which limited construction activity and retail sales). The Bank of England has estimated the extra holiday could have knocked up to 0.5 percentage point off q/q GDP in the second quarter. So GDP growth of 1.0% q/q in the third quarter was clearly boosted by the making up of some of the activity lost in the second quarter as well as by a seemingly overall positive impact from the Olympic and Paralympic Games (ticket sales alone added 0.2 percentage point to third-quarter GDP growth).
The first estimate of the national accounts was based solely on the output side of the economy and indicated that GDP growth was led by robust expansion in the dominant services sector (up 1.3% q/q). This followed a dip of 0.1% q/q in the second quarter after growth of 0.2% q/q in the first quarter. In addition, industrial production rebounded 1.1% q/q in the third quarter after drops of 0.7% q/q in the second quarter and 0.2% q/q in the first quarter. Disappointingly, though, construction output fell a further 2.5% q/q in the third quarter following declines of 3.0% q/q in the second quarter and 5.9% q/q in the first quarter. This left construction output down a massive 10.8% y/y in the third quarter.
The risk that third-quarter GDP growth could be trimmed to 0.9% q/q from the first estimate of 1.0% q/q stems from the fact that latest data indicate industrial production expanded 0.9% q/q rather than 1.1% q/q. Even so, the Office for National Statistics reported that this in itself would knock less than 0.05 percentage point off the GDP growth rate. Meanwhile, the revision in the third-quarter fall in construction output to 2.6% q/q from 2.5% q/q will have no discernible impact. The critical factor as to whether GDP is adjusted down will be whether there are any significant revisions to the 1.3% q/q growth in services output, and there is no new information available on that score.
The components breakdown for the expenditure side of GDP in the third quarter will be released for the first time. There seems little doubt that consumer spending rose strongly, given retail sales volumes increased 0.9% q/q in the third quarter while there was growth of 1.6% q/q in the output of the distribution, hotels, and catering segment of the services sector. Significantly, consumers increasingly benefited over the summer months from robust employment growth, a marked overall retreat in consumer price inflation, and an edging up of earnings growth from early-2012 lows. Net trade also appeared to make an appreciable positive contribution to GDP in the third quarter, although this was likely largely a correction after the particularly poor performance in the second quarter.
While the third-quarter GDP growth of 1.0% q/q was encouraging and welcome news, the UK is by no means out of the economic woods and further relapses remain a very real possibility.
It is looking increasingly questionable whether the economy will grow in the fourth quarter. Bank of England Governor Sir Mervyn King has warned the economy could suffer a renewed small drop in output in the fourth quarter as the positive impact from the Olympics in the third quarter is reversed. Furthermore, concern of a renewed dip in GDP in the fourth quarter has been fuelled by a 0.8% month-on-month (m/m) relapse in retail sales volumes in October, as well as disappointing overall October survey evidence from the purchasing managers for services, manufacturing, and construction activity. Furthermore, the Confederation of British Industry (CBI) industrial trends survey for November showed soft orders and reduced output expectations for the next three months.
We had penciled in marginal GDP growth of 0.1% q/q in the fourth quarter, but the risks to this forecast are clearly to the downside. Much will clearly depend on whether or not consumers spend at a reasonable rate in November and (particularly the critical month of) December, and how well services activity holds up.
The hope has been an underlying improvement in consumers’ health will support spending going forward. Specifically consumers have been benefiting in recent months from robust employment growth, a marked overall retreat in consumer price inflation (to a 34-month low of 2.2% in September 2011 from a peak of 5.2% in September 2012), and an edging up in earnings growth from the lows seen earlier in 2012.
Nevertheless, latest developments have not been kind to consumers, which heighten concern that they could keep a tight grip on their purse strings in the near term at least. In particular, the spike in consumer price inflation from 2.2% in September to 2.7% in October, coupled with a slowdown in earnings growth in September itself, puts renewed pressure on consumers’ purchasing power. Specifically, headline annual earnings growth dipped to 1.7% in September after rising to 2.3% in August from a low of 0.1% in January. Underlying earnings growth (which excludes bonuses) dipped to 1.6% in September after rising to 2.1% in August from 1.0% in January. Furthermore, inflation could well reach 3.0% in the next few months as utilities raise energy tariffs appreciably. Meanwhile, the latest labor market data hinted at some waning of the recent strength.
Also likely to limit the upside for personal expenditure for some time to come, many consumers need to deleverage. Finally, serious concerns and uncertainties persist over the domestic and global (particularly Eurozone) economic outlook. Consumer confidence disappointingly relapsed to a six-month low in October, having previously trended up gradually to a 15-month high in September.
If GDP did edge up 0.1% q/q in the fourth quarter, it would result in flat GDP overall in 2012. If GDP declines modestly in the fourth quarter, or even if it is flat, it will result in marginal overall contraction in 2012.
We expect GDP growth to be modest overall and fitful in 2013. Fiscal austerity, tight credit conditions, muted global economic activity, and continuing serious problems in the Eurozone are all likely to hamper growth for some time to come, while consumers will still face limitations to their spending ability. In such an uncertain and still-difficult environment, firms are likely to continue to be very cautious in investing, and it remains to be seen whether the “Funding for Lending Scheme” leads to a significant pickup in credit to companies (especially smaller ones). Consequently, we see UK GDP growth limited to 1.1% in 2013.
Mortgage approvals in October and house prices in November
The Bank of England is expected to report on Thursday that mortgage approvals for house purchases rose to a nine-month high of 52,000 in October from 50,024 in September and 47,921 in August. This would take mortgage approvals modestly above the average monthly level of 50,040 seen through the first nine months of 2012. Even so, mortgage approvals would still be modestly down (1.2% y/y) from 52,648 in October 2011.
Compared with long-term norms, mortgage approvals would still be weak at 52,000 in October. Specifically, mortgage approvals have averaged 86,048 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 rose to GBP800 million in October from GBP491 million in September. Even so, this would be down from GBP1.4 billion in October 2011 and also still very low compared with long-term norms. Specifically, net mortgage lending has averaged GBP3.9 billion a month since 1993. Net mortgage lending has been limited both by muted housing market activity and by high capital repayments.
We expect November house price data to be released during the week by the Nationwide to show a very small monthly rise. Specifically, we expect the Nationwide to report that house prices edged up by 0.1% m/m in November. However, this would still leave house prices down 0.9% y/y in November. Latest data from the Nationwide show that house prices rose by 0.6% m/m in October after falling by 0.5% q/q in the third quarter.
There have been increasing signs that housing market activity is improving modestly from its recent lows. For example, the Council of Mortgage Lenders reported gross mortgage lending rose to an 11-month high in October, while the latest survey from the Royal Institution of Chartered Surveyors (RICS) also pointed to a limited pickup in housing market activity in October. In particular, the RICS survey showed new buyer enquiries and agreed sales both increasing at their fastest rate in October since December 2009. There was also a pickup in new properties coming on to the market.
Any signs of a pickup in housing market activity needs to be treated with considerable caution as, firstly, there have been some false dawns recently, and, secondly, housing market activity remains very low compared with long-term norms. Furthermore, there are still serious headwinds facing the housing market that are likely to limit the upside for activity and contain prices.
Nevertheless, the recent signs of modestly improving housing market activity and the likely increasing beneficial impact of the Funding for Lending Scheme lead us to believe house prices are now likely to be essentially stable over the coming months, rather than drift down gradually. Nevertheless, we still suspect that any significant, sustainable turnaround in house prices is still some way off.
On the negative side, house prices are likely to be limited by still relatively limited market activity, low and fragile consumer confidence, and muted earnings growth. Furthermore, the housing supply-demand balance currently seems to be in favor of sellers overall. For example, the latest evidence from Hometrack indicates that movements in houses coming on to the market exceeded new buyers registering for a seventh successive month in October.
Nevertheless, some support for house prices should come from recent decent employment growth and likely extended low interest rates, while mortgages appear to be becoming increasingly available helped by the “Funding for Lending” scheme launched at the start of August by the Bank of England. The Bank of England’s latest credit conditions survey indicated that banks plan a big rise in mortgage availability during the fourth quarter after a substantial increase in the third quarter. A number of lenders have also recently cut some of their fixed mortgage rates, although mortgage conditions remain challenging for many people who are unable to raise large deposits. Both the Council of Mortgage Lenders and the RICS believe the Funding for Lending Scheme has made an early, positive impact on the mortgage market.
If the economy can keep on growing after GDP rebounded 1.0% q/q in the third quarter that would be good news for the housing market, especially if it supports employment. We are doubtful the economy can grow fast enough on a sustained basis in the near term at least to really help the housing market. It is questionable whether the economy will be able to grow at all in the fourth quarter.
Consumer credit in October
The Bank of England is expected to report on Thursday that there was a much reduced rise of GBP200 million in unsecured consumer credit in October. This would be down from a surprisingly large increase of GBP1.2 billion in September, which was in marked contrast to modest net repayments in both August (GBP91 million) and July (GBP69 million). In September, there was a net increase of GBP307 million in credit card borrowing, which was up appreciably from GBP72 million in August. There was also a marked net rise of GBP893 million in other loans and advances, which was the highest increase since February 2008 and contrasted with a net repayment of GBP163 million in August.
The marked rise in consumer credit in September was particularly notable as consumers’ appetite for new borrowing has been limited for some considerable time, while there has also been an ongoing strong desire of many consumers to reduce their debt. This has clearly reflected serious concerns over the extended weakness of the economy and major worries and uncertainties over the outlook.
It is possible that borrowing may have increased in September as a lagged consequence of people splashing out on Olympics and Paralympics tickets and visits. It is also possible some consumers felt more confident about borrowing in September as a consequence of recent healthy employment growth, lower overall inflation, and an edging up in earnings growth from the lows seen earlier in 2012. Certainly, consumer confidence edged up to a 15-month high in September while retail sales were healthy during the month.
It is notable consumer confidence suffered a relapse in October while retail sales volumes fell markedly. This suggests consumers are still cautious overall, and we expect this to be reflected in muted unsecured consumer credit in October. We suspect that consumers’ appetite for new taking on new borrowing is still generally limited and there is an ongoing strong desire of many consumers to reduce their debt.
CBI distributive trades survey for November
The CBI distributive trades' survey for November (out Thursday) is expected to point to modest retail sales growth. Specifically, we expect the CBI survey to show that the balance of retailers reporting that sales were up y/y fell to +12% in November after jumping to +30% in October, from +6% in September and -3% in August (when sales were seemingly hindered overall rather than helped by the Olympic Games). October’s balance was the second highest (after +42% in June) since January 2011. Even so, November’s expected balance of +12% would be above the monthly average of +5% during the first nine months of 2012.
The robust October CBI distributive trades survey contrasted markedly with a weak survey from the British Retail Consortium (BRC) and was completely at odds with hard data from the Office for National Statistics, which showed retail sales volumes fell by 0.8% m/m in October after a 0.5% m/m rise in September. Given the BRC survey for a month comes out much later than the CBI’s, the implication was that retail sales weakened substantially as October progressed, and there were indications that this was the case in the BRC’s findings.
We expect retail sales to have improved modestly overall in November after October’s very disappointing performance. A recently released survey on household finances in November by Markit indicated that household spending picked up in November. Certainly, retailers will be desperately hoping consumers are prepared to spend a reasonable amount over the critical Christmas period, while a significant pickup in retail sales from October’s weakened levels is vital if the economy is to eke out even marginal growth in the fourth quarter.
As outlined in the GDP analysis above, the hope for retailers has been that an underlying improvement in consumers’ health would lift spending, and there was evidence of this in the third quarter. Specifically consumers had been benefiting in recent months from robust employment growth, a marked overall retreat in consumer price inflation, and an edging up in earnings growth from the lows seen earlier in 2012.
October’s move up in consumer price inflation to 2.7%, a moderation in earnings growth in September, and some signs that employment growth is waning is fuelling concern that consumers are coming under renewed pressure, which could lead them to rein in their spending in the near term at least. This is a particularly worrying prospect for retailers as the vital Christmas period kicks in. It is also worrying for hopes that the economy can keep growing in the fourth quarter, given the critical role of consumer spending.
Consumer confidence in November
The GfK/NOP consumer confidence index (overnight Thursday/Friday) is expected to have improved marginally in November, after relapsing to a six-month low in October. Specifically, we expect the GfK/NOP consumer confidence index (which is carried out on behalf of the European Commission) to have edged up to -29 in November after falling to a six-month low of -30 in October from a 15-month high of -28 in September. The index had previously edged up to September’s high from -29 in August–May, and -31 in April and March. In fact, with the exception of a brief spike higher in May/June 2011, the consumer confidence index has been locked in a -28 to -33 range since January 2011. This is among the lowest levels since the index started in 1974 and is substantially below its lifetime average of -8.
Consumer confidence could have been lifted modestly in November by reduced pessimism over the state of the economy and the outlook following the news that GDP expanded by a better-than-expected 1.0% q/q in the third quarter. The October consumer confidence survey was carried out before this was known. Nevertheless, the upside for confidence is likely to have been limited by higher energy prices being charged by utilities and increased food prices.
By Howard Archer
27 Nov - GDP, Third Quarter 2012 (Quarter-on-Quarter): +1.0%
27 Nov - GDP, Third Quarter 2012 (Year-on-Year): 0.0%
29 Nov - Bank of England Consumer Credit, October (GBP/Billion): 0.2
29 Nov - Bank of England Net Lending Secured on Dwellings, October (GBP/Billion): 0.8
29 Nov - Bank of England Number of Loan Approvals for House Purchase, October (000s): 52.0
29 Nov - CBI Distributive Trades Reported Volume of Sales, November: +12%
30 Nov - GfK Consumer Confidence, November: -29
During week - Nationwide House Price, November (Month-on-Month): +0.1%
During week - Nationwide House Price, November (Month-on-Month): -0.9%