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Survey evidence from the purchasing managers is expected to indicate that services, manufacturing, and construction activity was essentially flat overall in December. This result will do little to reduce uncertainty as to whether or not the economy has been able to avoid a renewed GDP dip in the fourth quarter of 2012. It will reinforce belief that the economy faces a tough environment going into 2013, although life will hopefully be a little easier compared with 2012.
Manufacturing purchasing managers’ survey for December
The manufacturing purchasing managers' index (PMI; out Wednesday) is expected to show that overall activity in the sector was close to stabilizing in December. Specifically, we forecast the PMI to have improved to a four-month high of 49.6 in December after rising to 49.1 in November from 47.3 in October. This would take the index close to the critical 50.0 level that indicates flat activity.
The Confederation of British Industry (CBI) has already released its industrial trends survey for December, which showed significant improvement compared with November (although as it was released on 13 December, it only covered early December). Specifically, the CBI survey showed that balance of manufacturers reporting that their orders are at normal levels jumped to -12% in December from -21% in November and -23% in October. This took it appreciably above the long-term average of -17% for the orders balance. The indication from the survey is that domestic demand saw clear strengthening in December. There was also improvement in the export order balance as it rose to -11%, from -12% in November and -22% in October. The December reading was well above the long-run average of -21%. Meanwhile, helped by improved orders and generally low stocks of finished goods, manufacturers expected production to be flat over the next three months. This was a marked improvement on November when a balance of 9% of manufacturers expected their production to fall over the next three months.
While the purchasing managers’ survey is expected to offer some grounds for hope for manufacturers as they head into 2013, it is evident that the sector faces tough domestic and global conditions. Domestic demand for manufactured goods is handicapped by current muted investment intentions and tightening public spending. Furthermore, consumers’ purchasing power is coming under renewed pressure from a move up in inflation and muted earnings growth. On top of this, a still uncertain and difficult economic environment is still causing some orders to be delayed or even cancelled.
Meanwhile, muted global economic growth, and Eurozone economic weakness in particular, is currently still a constraint for foreign demand for UK-manufactured goods.
Construction purchasing managers’ survey for December
This PMI (Thursday) is likely to point to modest contraction in construction activity in December. While latest hard data show construction output leapt 8.3% month-on-month (m/m) in October, this result appears to have been largely a correction after output suffered a further sharp drop of 2.5% quarter-on-quarter (q/q) in the third quarter following drops of 2.8% q/q in the second quarter and 6.4% q/q in the first quarter. As a result, construction output was down a massive 11.2% year-on-year (y/y) in the third quarter. It was also still down 5.1% y/y in October despite the m/m surge.
Most survey evidence, including the purchasing managers’ survey for November and the December report by the Bank of England’s regional agents (which covers November), indicates construction activity is still contracting, although the rate of decline may have eased recently. For example, the Bank of England’s regional agents observed that “construction output continued to decline through 2012, and remained at low levels. Some regions, however, were starting to see a moderation or stabilisation in the rate of decline. This tended to reflect a modest improvement in private sector activity in some areas, which was partially offsetting continued contraction in public sector demand. There was some improvement in infrastructure projects, particularly those related to energy and rail.”
With the very wet weather likely to have hit construction output in December, we expect the purchasing managers’ business activity index to have fallen to a four-month low of 49.0 in December from 49.3 in November and 50.9 in October. This result would take the index modestly further below the critical 50.0 level that is meant to indicate unchanged activity.
October’s sharp jump in construction output means the sector does seem set to see appreciable q/q expansion in the fourth quarter of 2012. This outcome would be in marked contrast to the first three quarters and gives the economy a decent chance of avoiding a renewed dip in GDP in the fourth quarter.
The key question going forward is will the construction sector see any significant improvement in its fortunes in 2013? It certainly continues to face major headwinds, notably including reduced public investment and spending, an extended weak economy, a struggling housing sector, and problems in getting funding for large-scale projects.
The construction sector will be fervently hoping the economy can see sustained growth in 2013, and that this stimulates building work. The sector will also be hoping desperately that the government comes up with more support and initiatives to lift activity on top of the limited help provided in the Autumn Statement.
Service sector purchasing managers’ survey for December
We forecast the business activity index of the service sector purchasing managers' survey (Friday) to have improved marginally to 50.5 in December after falling to a 23-month low of 50.2 in November from 50.5 in October, 52.2 in September, and a five-month high of 53.7 in August. This improvement would keep the index just above the 50.0 level that indicates expansion. It is worrying that not only did the November purchasing managers’ survey show services activity expanding at the slowest rate since December 2010, but it also showed incoming new business contracting, albeit marginally, for the first time in 23 months.
Latest hard data from the Office for National Statistics show services output edged up 0.1% m/m in October. Meanwhile, the Bank of England’s regional agents stated in their December report (which relates to activity in November) that “business services turnover growth remained modest, constrained by subdued demand and intense competition, which was restricting pricing power.” The agents also reported that “growth in consumer services turnover slowed marginally, in part reflecting a slight falling back following the Olympics-related boost”.
Given the dominant role of services, if the sector managed to eke out even modest growth in the fourth quarter it would have significantly boosted the economy’s chances of avoiding a renewed dip in GDP.
The worry is that service companies will have their work cut out to achieve anything more than modest growth in the near term at least because of the still-uncertain business outlook and tightening government spending. In addition, there are still significant pressures on consumers, which are likely to limit the upside for their spending on services for some time to come.
Mortgage approvals in November and house prices in December
The Bank of England is expected to report on Thursday that mortgage approvals for house purchases edged up to a 10-month high of 53,800 in November from 52,982 in October and 50,415 in September. This would take mortgage approvals further above the average monthly level of 50,384 seen through the first 10 months of 2012. Mortgage approvals would also be up 2.6% y/y from 52,412 in November 2011.
Even so, mortgage approvals would still be weak compared with long-term norms at 53,800 in November. Specifically, mortgage approvals have averaged 85,909 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 modestly to GBP400 million in November after dipping to just GBP199 million in October from GBP582 million in September. Even so, this would be down from GBP710 million in November 2011 and 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 house price data to be released during the week by the Nationwide and Halifax lenders to show that prices were essentially stable in December. Specifically, we expect the Nationwide lender to report that house prices were flat m/m in December, which would leave them down 0.9% y/y. Latest data from the Nationwide show that house prices were flat m/m in November after rising 0.6% m/m in October and falling 0.4% m/m in September. The Halifax lender is also expected to report that house prices were flat m/m in December, which would cause them to be down 0.6% y/y in the three months to December. Latest data from the Halifax showed house prices rose 1.0% m/m in November after falling in each of the previous four months.
While significant downside risks remain to house prices, particularly in the near term, recent signs of modestly improving housing market activity and the likely increasing beneficial impact of the Funding for Lending Scheme on mortgage lending leads us to believe house prices will be broadly flat over 2013. Nevertheless, there could well be significant monthly fluctuations in house prices, with bouts of weakness.
We suspect any significant, sustainable, turnaround in house prices is still some way off.
On the negative side, house prices are likely to be held down by still relatively limited market activity (despite the recent modest pickup), low and fragile consumer confidence, and muted earnings growth. We also doubt the economy will grow fast enough for some time to come to provide any significant support to the housing market. 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 ninth successive month in December.
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 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. The Halifax, the Council of Mortgage Lenders, and the Royal Institution of Chartered Surveyors all believe the Funding for Lending Scheme has made an early, positive impact on the mortgage market.
Consumer credit in November
The Bank of England is expected to report on Thursday that there was a rise of just GBP100 million in unsecured consumer credit in November. The Bank of England previously reported a net repayment of GBP463 million in unsecured consumer credit in October, which was the largest net repayment since December 2011. This followed a GBP1.103-billion increase in unsecured consumer credit in September, which had been the sharpest rise since February 2008 and was in marked contrast to the modest net repayments in both August (GBP135 million) and July (GBP163 million). In October, there was a net repayment of GBP132 million on credit cards, which followed net borrowing of GBP307 million in September. There was also a net repayment of GBP331 million in other loans and advances in October. This followed net borrowing of GBP795 million in other loans and advances in September, which was the highest since February 2008. 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.
The general impression is consumer appetite for taking on new borrowing is still limited while there is also an ongoing strong desire of many consumers to reduce their debt. Consumers’ desire and perceived need to deleverage is clearly the consequence of ongoing serious concerns over the current state of the economy and still-heightened worries and uncertainties over the outlook. Significantly, the British Bankers’ Association has reported that “the outstanding level of individuals’ borrowing on personal loans is almost half its peak in late 2007/early 2008.
By Howard Archer
2 Jan - Manufacturing Purchasing Managers Index, December: 49.6
3 Jan - Construction Purchasing Managers Index, December: 49.0
3 Jan - Bank of England Consumer Credit, November (GBP/Billion): 0.1
3 Jan - Bank of England Net Lending Secured on Dwellings, November (GBP/Billion): 0.4
3 Jan - Bank of England Number of Loan Approvals for House Purchase, November (000s): 53.8
4 Jan - Service Sector Purchasing Managers Index, December: 50.5
During Week - Nationwide House Prices, December (Month-on-Month): 0.0%
During Week - Nationwide House Prices, December (Year-on-Year): -0.9%
During Week - Halifax House Prices, December (Month-on-Month): +0.0%
During Week - Halifax House Prices, December (Year-on-Year): -0.6%