GDP in First-Quarter 2012

Thursday sees the third estimate of GDP in the first quarter of 2012. While first-quarter GDP contraction of 0.3% quarter-on-quarter (q/q) and 0.1% year-on-year (y/y) still seems a markedly weaker performance than was portrayed by much of the data and (particularly) survey evidence during January–March, there seems little reason to expect that there will be any major changes to the data. For example, recently released data for April relating to construction output and industrial production did not show any significant revisions to the first-quarter performance.

The best that can be said about the first-quarter GDP data was that on the expenditure side at least, the underlying performance was not quite as bad as portrayed by the 0.3% q/q contraction. Consumer spending rose for a second successive quarter, albeit marginally, while there was a decent rebound in business investment after it fell sharply in the fourth quarter of 2011. Furthermore, a substantial running down of stocks knocked 0.7 percentage point off GDP growth, so it would have expanded by 0.4% q/q excluding that factor. Nevertheless, growth was lifted by a marked jump in government spending, which is at odds with the government’s fiscal austerity plans and clearly unsustainable, while net trade was modestly negative as exports of goods and services only edged up 0.1% q/q and imports rose 0.4%.

On the output side of the economy, GDP was dragged down by a still highly questionable looking 4.8% q/q drop in construction output (actually revised to 4.9% in latest data), which contributed 0.4 percentage point to the overall contraction of 0.3% q/q. Meanwhile, industrial production fell 0.4% q/q, while output in the dominant services sector edged up just 0.1% q/q.

It looks highly questionable whether the economy has been able to return to growth in the second quarter as intensified problems in the Eurozone and slowing global growth—as well as the overall hit to activity coming from the extra day’s public holiday from the Queen’s Diamond Jubilee) have countered the help coming from a sharp retreat in oil prices from their March highs. The economy’s ability to grow in the second quarter was always going to be limited by an overall loss of activity resulting from the extra day’s public holiday in June, but there were hopes that this would be at least partly countered by a marked bounce-back in construction activity and improvement in the manufacturing and services output more in line with the healthier survey evidence in the first quarter.

Construction output suffered a further sharp drop in April when manufacturing output also contracted markedly (although overall industrial production was flat due to a jump in utilities output) while May construction and manufacturing survey evidence weakened appreciably. Further bad news saw the United Kingdom suffer a substantially widened trade deficit in April, which suggests that net trade will be negative again in the second quarter.

The main hope that the economy could avoid a third successive quarter of contraction in the second quarter lies with the fact that survey evidence for the services sector has held up better than for manufacturing and construction, and that retail sales saw a decent rebound in May. There are also signs that manufacturing saw some underlying improvement in June, although actual output may well have been hit by the extra holiday.

Public Finances in May

Public finances data for May (out Tuesday) are expected to have weakened compared with a year earlier. Specifically, we forecast there to have been a Public Sector Net Borrowing Requirement (PSNBR) excluding financial interventions of GBP16.5 billion in May, which would be up from a shortfall of GBP15.0 billion in May 2011. May is the second month of fiscal year 2012/13 when Chancellor George Osborne is aiming to trim the PSNBR GBP120 billion from the 2011/12 outturn of GBP124.4 billion (this is stripping out the one-off boost to the public finances this year coming from the transfer of GBP28.0 billion of assets from the Royal Mail’s pension funds).

May’s public finances are expected to have been pressurized by the hit to tax revenues coming from weakened economic activity. This is seen outweighing the beneficial impact of more fiscal tightening kicking in as the new fiscal year gets under way.

CBI Distributive Trades Survey for June

The Confederation of British Industry (CBI)’s distributive trades' survey for June (Tuesday) will give an indication as to whether consumer spending is showing signs of underlying improvement as lower consumer price inflation eases the squeeze on purchasing power. Latest hard data from the Office for National Statistics show that retail sales volumes rose 1.4% month-on-month (m/m) in May, although that followed a fall of 2.4% in April. It is also evident retail sales were lifted in May by better weather lifting sales of summer clothing and outdoor goods. It also may well have been the case that sales were given a boost in late May by people gearing up to celebrate the Queen’s Diamond Jubilee.

We expect the CBI survey to show that the balance of retailers reporting that sales were up y/y was +15% in June. The balance spiked to a one-year high of +21% in May from -6% in April. This was also well above the overall average of +3% for 2011. Also in the May survey, retailers were relatively upbeat about near-term sales prospects, with a balance of +25% expecting sales to be up y/y in June. This was the best sales expectation since February 2011.

Retailers will be very much hoping the Olympics will provide a significant lift to their sales over the coming weeks as people buy related merchandise and souvenirs, and also buy extra drink and food to enjoy watching the Games. The Olympic Games may also lead to more people upgrading their televisions.

An extended burst of good weather would also go down well with retailers as it would lift demand for summer clothing and outdoor goods.

There are some recent hopeful developments for retailers. The squeeze on consumers’ purchasing power has eased recently with inflation coming down to a 30-month low of 2.8% in May, having been as high as 5.2% last September. Furthermore, May saw a marked drop in petrol prices and a significant easing in the y/y in food prices. This may free up a little more spending power of consumers on discretionary purchases. Meanwhile, latest data show that employment rose 166,000 in the three months to April, while consumer confidence rose in May.

It seems unrealistic to expect any major pickup in consumer spending in the near term at least. There is currently still a significant squeeze on consumers’ purchasing power as consumer price inflation of 2.8% in May was still nearly a full percentage point above annual earnings growth of 1.9% in April. Furthermore, tighter fiscal policy is also adding to the squeeze on some consumers. Meanwhile, unemployment is still high, with many of the job gains in part-time or low-paid work, or due to a rise in self-employment.

Although consumer confidence improved in May, it is still extremely low compared with long-term norms, which is hardly surprising given that the United Kingdom is in recession again and there are ongoing major uncertainties and concerns over the situation in the Eurozone (centered on Greece and, also, Spain) and how this could hit the country. In fact, although consumer confidence increased in May, the sub-index relating to whether or not it is a good time to make major purchases fell to its equal lowest level (with last October) since November 2008.

The recent sharp drop in oil prices boosts hopes that consumer price inflation will fall appreciably further over the coming months and continue to ease the squeeze on consumers. Nevertheless, unemployment is likely to remain high (and could very well move up) and wage growth muted, so the overall environment will likely still be pretty tough for consumers.

Consumer Confidence in June

The GfK/NOP consumer confidence index (overnight Thursday/Friday) is forecast to have edged back in June after improving modestly in May. Specifically, we expect the GfK NOP consumer confidence index (which is carried out on behalf of the European Commission) to have fallen to -30 in June after improving to -29 in May from -31 in both April and March. In fact, with the exception of a brief spike in May/June 2011, the consumer confidence index has been locked in a -29 to -33 range since January 2011. This is among the lowest levels since the index started in 1974 and substantially below its lifetime average of -8.

Consumer confidence is expected to have softened in June, primarily because of increased pessimism over the current state and outlook for the UK economy, given the recent largely weakened latest economic data and surveys. In addition, heightened concerns over that the Eurozone’s problems and how the UK economy could be harmed are seen weighing down on confidence.

The overall drop in confidence is expected to have been limited by a significant feel-good factor emanating from the Queen’s Diamond Jubilee celebration. In addition, recent lower petrol prices may have helped to ease inflation concerns.

House Prices in June

The Nationwide lender is expected to report during the week that house prices were flat m/m in June. Latest data from the Nationwide show that house prices rose 0.3% m/m in May after falling 0.3% m/m in April and 1.0% m/m in March. Flat prices in June would leave house prices down 0.7% y/y.

We expect house prices to fall around 3% by the end of 2012 in the face of high unemployment, muted wage growth, and low and fragile consumer confidence. Housing market activity is persistently low compared with long-term norms and while it may eventually be lifted by more mortgages being granted at decent interest rates under the “funding for lending” scheme announced by the Bank of England and the Treasury, this is unlikely to be a major factor in the near term at least.

Furthermore, there remains a significant danger that house prices could fall even more than this due to the serious downside risks to the UK economic outlook, particularly stemming from the problems in the Eurozone centered on Greece and Spain. While the Greek election result has reduced the likelihood of an imminent Greek exit from the Eurozone, it remains a very real risk as Greece’s problems remain huge.

It is possible that house prices will gain some support from a shortage of properties on the market, but this tends to vary markedly between regions as a factor. Meanwhile, although mortgage interest payments as a percentage of disposable income are currently very low, other affordability measures are not so favorable with the house price/earnings ratio above its long-term average.