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24/07/2010 | Main U.K. Economic Releases for the Week of 26 July

Howard Archer

Following the startling news that U.K. GDP growth spiked up to 1.1% quarter-on-quarter in the second quarter, forthcoming data and surveys are likely to support belief that this rate of growth will not be matched in the third quarter.

 

CBI Distributive Trades Survey for July

The Confederation of British Industry (CBI) distributive trades survey for July (out on Tuesday) is forecasted to show that the balance of retailers reporting that sales were up year-on-year rose to +5% in July from -5% in June and a 14-month low of -18% in May. This, however, would still be well below the +13% level seen in April. Sales are expected to have been helped in July by the good weather and decent discounting in the summer sales.

Further out though, it is hard to be optimistic about the prospects for consumer spending. Consumer confidence has been heading south recently, and households face serious headwinds, notably including high unemployment, muted earnings growth, elevated debt levels, and high fuel prices. In addition, the substantial fiscal squeeze will increasingly hit public sector jobs and consumers' pockets. There is also the possibility that the Bank of England could raise interest rates before the end of the year because of heightened inflation concerns, although we lean towards the view that the bank will hold fire given still serious downside risks to growth.

Longer term, retail sales will be hit by the Value-Added Tax rising from 17.5% to 20% in January 2011; however, this could bring forward some spending later this year as consumers look to make purchases of more expensive items ahead of the increase.

Mortgage Approvals in June and House Prices in July

The Bank of England is expected to report on Thursday that mortgage approvals for house purchases eased back to 48,500 in June from 49,815 in May and a 2010-high of 49,828 in April. This would be well down from the 21-month high of 59,572 seen last November and substantially below the 70,000-80,000 level that has in the past been considered consistent with stable house prices. Mortgage approvals have actually averaged 91,300 a month since 1993. The Bank of England is also forecasted to report that net mortgage lending was limited to just £1.0 billion in June. This would be down from £1.2 billion in May and below the monthly average of £1.3 billion for the previous six months. It would also be extremely low compared with long-term norms.

Meanwhile, the Nationwide lender will also release its house price index for July on Thursday. We expect this to show that house prices fell 0.5% month-on-month in July, after the rise previously moderated to just 0.1% in June from 0.5% in May and 1.1% in April. This would push the year-on-year increase in house prices down to 6.8% in July from 8.7% in June and the recent peak of 10.5% in April. The Halifax lender has actually reported house prices falling month-on-month for three successive months through to June.

We suspect that house prices could fall back by 3-5% over the second half of 2010. Housing market activity is currently relatively low, the economic fundamentals are far from ideal for the housing market (notably high unemployment and muted wage growth), a major fiscal squeeze is now starting, and house price/earnings ratios have moved back up overall from their early-2009 lows and are above their long-term averages.

On top of this, credit conditions remain tight with mortgages still hard to get for many people. Furthermore, household confidence has been heading down recently and already deepening concerns over the strength and sustainability of the recovery may be intensified by the extra austerity measures that were announced in June's emergency budget. There are also concerns that the Bank of England will raise interest rates before the end of the year due to sticky, above-target inflation. The more worried consumers are, the less likely they will want to commit to buying a house.

Meanwhile, more properties have been coming on to the market thereby moving the supply/demand balance more in favor of buyers. This is particularly relevant as a shortage of properties has been a key factor in the recovery in house prices from their early-2009 lows. It may be that the new government's decision to abolish Home Information Packs is now contributing to the rise in houses coming on to the market.

On the positive side, some support for house activity and prices will come from the current stamp duty holiday for first-time buyers on all properties costing up to £250,000. And interest rates are likely to stay low for an extended period to offset the fiscal tightening.

Furthermore, it is hard at this stage to be optimistic about house prices in 2011 as the fiscal squeeze will increasingly kick in, which will hit people's pockets and lead to serious job losses in the public sector. Consequently, a further drop of 5-10% in house prices looks highly possible in 2011. Therefore, we believe that house prices could be around 10-12% lower by end-2011 compared with their mid-2010 levels.

Consumer Credit in June

The Bank of England is expected to report on Thursday that net consumer credit edged up by £0.2 billion in June. There would be down from an increase of £331 million in May, but above the average monthly increase of £116 million over previous six months. Despite rising in May, it is notable that consumer credit remains muted compared to past norms.

The impression remains that consumer appetite for new taking on new borrowing is limited while there is an ongoing desire of many consumers to reduce their debt. This is the consequence of a still uncertain and somewhat troubling environment and the major fiscal squeeze that is now starting. Meanwhile, there remains limited availability of unsecured credit from banks.

Consumer Confidence in July

The GfK/NOP consumer confidence index (out overnight Tuesday/Wednesday) is expected to have fallen for a fifth consecutive month in July to be at its lowest level since August 2009. This is expected to be primarily due to increased consumer concern over both personal situations and the general economic outlook following the announcement of extra fiscal tightening in the June emergency budget.

Specifically, we forecast the confidence index to have retreated to -21% in July from -19% in June from -18% in May and the 2010-high of -14 in February. The consumer confidence index is appreciably below its long-term average of -8.


27 Jul - CBI Distributive Trades Reported Volume of Sales, July: +5%
29 Jul - Bank of England Consumer Credit, June (GBP/Billion): +0.2
29 Jul - Bank of England Net Lending Secured on Dwellings, June (GBP/Billion): +1.0
29 Jul - Bank of England Number of Loan Approvals for House Purchase, June (000s): 48.5
29 Jul - Nationwide House Prices, July (Month-on-Month): -0.5%
29 Jul - Nationwide House Prices, July (Year-on-Year): +6.8%
30 Jul - GfK Consumer Confidence, July: -21

Global Insight (Reino Unido)

 


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