Forthcoming data and survey evidence are expected to be firmer overall, thereby reinforcing expectations that the economy is on course to finally return to growth in the fourth quarter.
The Bank of England is expected to report on Monday that mortgage approvals for house purchases continued their recent gradual upward trend in October to reach a 19-month high of 57,500. This would be up modestly from 56,215 in September. Mortgage approvals for house purchases have risen gradually but steadily from a record low of 27,257 in November 2008. Even so, they still remain very low compared to past norms. Indeed, the Bank of England's data show that mortgage approvals averaged 92,700 a month between 1993 and 2009. It has also been considered that usually monthly mortgage approvals of 70,000-80,000 are consistent with stable house prices. The Bank of England is also forecast to report that net mortgage lending amounted to £1.0 billion in October. This would be up modestly from £0.9 billion in September and would also be above the average level of £0.6 billion over the past six months. Again though, this is still low compared to past norms.
Meanwhile, the Nationwide lender is forecast to report on Tuesday that house prices rose by 0.4% month-on-month in November. While this would be a seventh successive month-on-month increase in house prices, it would match October's smallest rise since April. Even so, it would cause the year-on-year increase in house prices to pick up to 2.4% in November from 2.0% in October. In marked contrast, house prices were down 17.6% year-on-year back in February.
The Halifax lender is also expected to release its house price index for November during the week. It too is forecast to show an increase of 0.4% month-on-month, which would be a fifth successive increase but down markedly from a gain of 1.2% in October. Consequently, the year-on-year fall in house prices is expected to moderate to 1.5% in the three months to November from 7.4% in the three months to October, and a peak of 17.7% in the three months to April. House prices would be up 1.7% year-on-year in November itself, compared to a drop of 1.5% in October.
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 back up due to the firming in house prices from their early 2009 lows. Furthermore, the threshold for having to pay stamp duty of 1% will move back down to properties costing £125,000 from £175,000 at the end of this year.
We suspect that still relatively low housing market activity and still largely unfavourable economic fundaments 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.
The Bank of England is expected to report on Monday that net consumer credit fell by a further £0.2 billion in October. This would follow declines in each of the previous three months, including a drop of £0.3 billion in September. A fourth successive net repayment in consumer credit in October is expected to be the consequence of many consumers' desire to reduce their debt, low demand for credit, and a lack of availability of unsecured credit from banks. Elevated and rising debt levels mean that there is an urgent need for many consumers to improve their balance sheets, while still serious concerns over jobs and the economic outlook are causing a substantial number of people to want to save more. Significantly, the Bank of England has identified the need for, and desire of, consumers to improve their balance sheets as a major factor that could limit economic growth over the medium and longer term. Meanwhile, very tight credit conditions continue to make it generally difficult for people to borrow.
The GfK/NOP consumer confidence index (out overnight Monday/Tuesday) seems likely to extend its upward trend by climbing to a two-year high in November. Specifically, we forecast the index to climb to -11 in November after rising appreciably to -13 in October from -16 in September and -25 in August. It had been as low as -37 back in January. Even so, it would still be modestly below the long-term (34-year) average of -8. Reduced pessimism over the recent state of the economy and increased optimism over the general economic outlook for the next 12 months is currently driving confidence up.
The manufacturing purchasing managers' survey (PMI - out on Tuesday) is expected to add to the recent healthier news on the sector. The Confederation of British Industry (CBI) has already released a healthier industrial trends survey for November, while latest hard data show that industrial production bounced back pretty well in September after plunging in August as several factories closed for a summer break. Specifically, we forecast the PMI to rise to a two-year high of 54.0 in November after rebounding to 53.7 in October from 49.5 in September. This would take it further above the critical 50.0 level that indicates expanding activity. Both output and new orders are expected to show clear expansion in November.
In the near term at least, manufacturers should benefit from sharply reduced stock levels, as well as from the weak pound helping exporters in addition to making U.K. manufacturers more competitive in their domestic markets. On top of this, domestic demand is currently picking up in important overseas markets including the Eurozone and the United States, while the survey evidence indicates that it is also improving at home. Nevertheless, serious doubts remain about the strength of demand for manufactured goods over the medium term, particularly once stimulative measures start being withdrawn.
The construction purchasing managers index (out on Wednesday) is likely to show that the sector is still contracting appreciably, albeit at a much reduced rate compared to earlier this year. We expect the PMI to come in at 46.5, which would be up marginally from the September level of 46.2. Indeed, this would be the fifth successive reading around this level, which is well up from February's low, but still clearly below the 50.0 level that indicates unchanged activity. National accounts data for the third quarter showed construction output contracting 1.1% quarter-on-quarter following drops of 0.8% in the second quarter and 6.9% in the first.
The construction sector is being helped to a limited extent by the government bringing forward some infrastructure spending as part of its efforts to boost the economy, while recent modestly but steadily rising housing market activity - and increased optimism over the outlook - has helped house building activity rise off its lows. Indeed, the October PMI indicated that housebuilding activity expanded modestly for a second month running. While the worst of construction's contraction may be over, recovery may well remain elusive for some considerable time to come. Serious doubts persist over the prospects both for the housing market and for commercial property. Over the long term, the construction sector will be hit by the government's need to significantly cut back public expenditure for an extended period, as this is bound to hit expenditure on infrastructure and public buildings.
The service sector purchasing managers' index (out on Thursday) is forecast to indicate that activity expanded for a seventh successive month in November and at the fastest rate since August 2007. Specifically, we expect the business activity index to have risen to 57.0 in November from 56.9 in October. This would be markedly above the 50.0 level that indicates unchanged activity. We also expect the survey to reveal relatively healthy growth in incoming new business and higher business expectations.
It appears that firming business and financial sector activity is lifting services demand and output, while it is also being helped by housing market activity picking up to a limited extent from the lows seen around the turn of the year. In addition, there are indications that consumer spending on services may have bottomed out. The survey evidence currently needs to be treated with caution. Despite the purchasing managers' business activity index pointing to the services sector expanding for a sixth successive month in October, and appreciably, the national accounts data nevertheless indicated that service sector output edged down 0.1% quarter-on-quarter in the third quarter after falling 0.6% quarter-on-quarter in the second quarter.
30 Nov - Bank of England Consumer Credit, October (GBP/Billion): -0.2
30 Nov - Bank of England Net Lending Secured on Dwellings, October (GBP/Billion): +1.0
30 Nov - Bank of England Number of Loan Approvals for House Purchase, October (000s): 57.5
30 Nov - GfK Consumer Confidence, November: -11
1 Dec - Nationwide House Prices, November (Month-on-Month): +0.4%
1 Dec - Nationwide House Prices, November (Year-on-Year): +2.4%
1 Dec - Manufacturing Purchasing Managers Index, November: 54.0
2 Dec - Construction Purchasing Managers Index, November: 46.5
3 Dec - Service Sector Purchasing Managers Index, November: 57.0
During Week - Halifax House Prices, November (Month-on-Month): +0.4%
During Week - Halifax House Prices, November (Year-on-Year): -1.5%