A preliminary estimate showing that GDP contracted 0.4% quarter-on-quarter was in sharp contrast to universal expectations that the U.K. economy had returned to growth. Consequently, there is much interest in whether the second estimate will show that the decline in GDP was less marked.
Serious attention will be focused on the second release of the third-quarter national accounts data (out Wednesday). The preliminary estimate from the Office for National Statistics (ONS) was a real shocker as it showed GDP contracting by 0.4% quarter-on-quarter (q/q), thereby confounding universal expectations that the economy had returned to growth.
It is very unusual for a second national accounts release to show substantial changes from the preliminary release, but the expectation (or is it just hope that we economists were not quite as wrong as it first appeared?) is that the decline in GDP in the third quarter was a little less than first estimated. Recent data showing that retail sales rose by 0.4% month-on-month (m/m) in September (rather than being flat as previously reported) boosts hopes that the contraction in GDP was less than reported in the preliminary release.
Specifically, we expect the decline in GDP in the third quarter to be trimmed to 0.3% q/q and 5.1% year-on-year (y/y), from 0.4% q/q and 5.2% y/y. While we would not rule out a bigger revision, it is probably hoping for too much. On the output side, we expect this to be primarily due to service sector activity being revised up from the currently reported contraction of 0.2% q/q. Indeed, revised data could show that the services sector was essentially stable in the third quarter.
This GDP release sees the first breakdown of the national accounts on the expenditure side. It is highly likely that there was further appreciable contraction in business investment in the third quarter, while stocks could have been run down at an increased rate. Consumer spending may well have been broadly flat as reduced spending on services countered a 1.1% q/q increase in retail sales and higher car sales resulting from the scrappage scheme. Trade data also suggest that net trade may well have been essentially neutral in the third quarter as increased imports offset a pickup in exports. Nevertheless, government spending and investment very likely supported economic activity as a result of the stimulus measures enacted.
Latest data and survey evidence are showing significant improvement, and it looks odds on that the economy will finally return to growth in the fourth quarter. Then again, like everyone else, we thought it had done so in the third quarter!
The Confederation of British Industry's distributive trades survey for November (Thursday) is expected to show a further firming in retail sales as the critical Christmas shopping period gets under way. Nevertheless, it needs to be borne in mind that the comparison is against a very weak performance a year earlier. Specifically, we forecast the CBI's survey to show that the balance of retailers reporting that sales were up y/y rose to +12% in November from +8% in October. This would compare very favourably with the average level of -17% for the first 10 months of 2009. The balance's long-term average is +18%.
An improved CBI distributive trades survey for November would boost hopes that the consumer is coming to life, at least temporarily, for Christmas. Very low mortgage interest payments and moderate inflation are boosting the purchasing power of a good many people, thereby giving them scope to step up their discretionary spending. It may also well be the case that a large number of people are determined to splash out and really enjoy Christmas after enduring a very difficult year. Furthermore, a significant number of consumers may look to make purchases in the final weeks of 2009 (especially of big-ticket items) ahead of the value-added tax (VAT) rise from 15.0% to 17.5% at the start of January.
Nevertheless, the suspicion remains that even if there is a significant pickup in spending over the Christmas period, it may only be temporary due to the serious headwinds still facing consumers. These notably include high and still rising unemployment (albeit at a recently reduced rate), low and still slowing earnings growth, heightened debt levels, and the previously mentioned VAT increase. Furthermore, many consumers are still keen to limit their expenditure, as concerns about the economy and their jobs have far from disappeared even if they have eased recently. There is also a widespread need/desire for consumers to improve their personal finances. The Bank of England has identified this as a factor that could significantly limit the recovery. Meanwhile, consumers will also be wary that further out they are very likely to face higher taxes, in addition to January's VAT hike, as part of the major corrective action that will be needed to rein in the awful government finances. Meanwhile, credit conditions facing consumers are still tight.
The British Bankers' Association (BBA) is expected to report on Tuesday that mortgage approvals for house purchases extended their gradual upward march in October, but remained well down on long-term norms. We forecast mortgage approvals to have climbed to 43,500 in October from 42,008 in September and a low of 18,277 in November 2008. Even so, this would still be substantially below the average monthly level of 60,699 seen since 1997.
Meanwhile, the Nationwide lender is forecasted to report during the week that house prices rose by 0.4% m/m in November. While this would be a seventh successive m/m increase in house prices, it would match October's smallest rise since April. Even so, it would cause the y/y increase in house prices to pick up to 2.4% in November from 2.0% in October. In marked contrast, house prices were down by 17.6% y/y in February.
While housing market activity has been lifted by the still-significant fall in house prices from their 2007 peak levels and low mortgage interest rates, the upside continues to be limited by unfavourable economic fundamentals (notably high and still rising unemployment, low and still moderating earnings growth) and ongoing relatively tight credit conditions. In addition, house price/earnings ratios are currently moving up again because of the firming in house prices from their early-2009 lows. Furthermore, the threshold for having to pay stamp duty of 1% will move down to include properties costing £125,000 from the current cutoff of £175,000 at the end of this year.
We suspect that still relatively low housing market and still largely unfavourable economic fundamentals mean that the firming in housing prices seen since March/April will fizzle out before long, and house prices will suffer a relapse in 2010. This is even more likely to occur if more properties come on to the market as a result of the recent firming in prices, given that a shortage of properties has been a key factor supporting house prices in recent months.
24 Nov - Business Investment, Third-Quarter 2009 (Quarter-on-Quarter): -3.9%
24 Nov - Business Investment, Third-Quarter 2009 (Year-on-Year): -22.5%
24 Nov - BBA Loans for House Purchases, October (000s): 43.5
25 Nov - GDP, Third-Quarter 2009 (Quarter-on-Quarter): -0.3%
25 Nov - GDP, Third-Quarter 2009 (Year-on-Year): -5.1%
25 Nov - Index of Services, October (3-month/3-month): -0.1%
26 Nov - CBI Distributive Trades Reported Volume of Sales, November: +12%
During Week - Nationwide House Prices, November (Month-on-Month): +0.4%
During Week - Nationwide House Prices, November (Year-on-Year): +2.4%