GDP in Q4 2009
The third release of the national accounts data for the fourth quarter of 2009 on Tuesday could well see GDP growth up modestly further to 0.4% quarter-on-quarter (q/q). It has already been upgraded in the second release to 0.3% q/q from the first estimate of just 0.1% q/q. If GDP growth is raised to 0.4% q/q, it would trim the year-on-year (y/y) decline in the fourth quarter to 3.2% from 3.3%. This would be down from 5.3% in the third quarter and a peak of 5.9% in the second quarter. The fourth-quarter return to growth followed a record six successive quarters of contraction during which GDP declined 6.2% overall.
With the economy clearly strengthening as the fourth quarter progressed, the increased data available for the end of the period could well lead to GDP growth being raised a little higher. Data just out show that business investment contracted 4.3% q/q for the fourth quarter. While still a dire performance, it was nevertheless less than the 5.8% q/q contraction currently shown in the national accounts data.
The fourth-quarter GDP data currently show that consumer spending grew 0.4% q/q in the fourth quarter, as it benefited from the car scrappage scheme and possibly some spending being brought forward ahead of the value-added tax (VAT) rising from 15.0% to 17.5% again in January. Exports also saw healthy growth of 3.7%, helped by the weak pound and improved global economic activity and trade. Nevertheless, imports rose an even sharper 4.1%, undoubtedly lifted by car imports, so net trade was actually modestly negative.Inventories were run down appreciably further but at a reduced pace, so they lifted overall GDP growth 0.5 percentage point. Disappointingly total investment fell 3.1% as it was dragged down by business investment falling sharply. Government spending and, apparently, investment were significantly positive as fiscal stimulus measures continued to take effect.
On the output side, the service sector expanded 0.5% q/q, while industrial productiongrew 0.4%. Construction output contracted 1.0%.
We maintain the view that the recovery will be bumpy and gradual for some time to come in the face of still-serious economic and financial sector headwinds, and that the economy will struggle to grow by more than 1.0% this year.
Mortgage Approvals in February and House Prices in March
The Bank of England is likely to report on Monday that mortgage approvals for house purchases only edged up to 48,500 in February after falling sharply to an eight-month low of 48,198 in January, from 58,223 in December and a 21-month high of 59,307 in November. Data already released by the British Bankers Association showed that mortgage approvals rose marginally in February after a marked falling off in January. The Bank of England is also forecasted to report that net mortgage lending weakened to £1.2 billion in February from £1.5 billion in January.
If mortgage approvals did indeed rise only marginally in February—or even fell further—after dropping sharply in January, it would suggest that the softening in housing market activity at the start of 2010 is more than just the consequence of the arctic weather in January. It would indicate that activity was likely inflated at the end of 2009 by home buyers trying to beat the renewed lowering of the price threshold for which stamp duty is levied on house purchases from £175,000 to £125,000 at the start of January.
Meanwhile, the Nationwide lender is expected to report on Tuesday that house prices were only flat month-on-month (m/m) in March after falling 1.0% in February. This was the first fall in house prices in 10 months reported by the Nationwide, although the rate of increase had previously been moderating overall from around October 2009. If house prices were flat in March, it would cause the y/y increase to moderate to 8.0% from 9.2% in February.
We suspect that house prices will be erratic and prone to corrections in 2010, and will probably be no better than flat over the year. We believe that the overall appreciable house prices rises that have been seen since early 2009 have been out of kilter with the overall economic fundamentals. This is even allowing for the support to the housing market coming from reduced mortgage interest rates and more affordable prices due to the pretty substantial fall in house prices from their October 2007 peak through to their early-2009 trough. Significantly, house prices have been lifted markedly since early 2009 by the shortage of properties for sale, but latest survey evidence suggests that more properties are now coming on to the market and this prop is crumbling.
Although the Bank of England may well hold off from raising interest rates until 2011, the overall economic environment (notably high unemployment and low earnings growth) is still far from supportive for house prices while credit conditions remain pretty tight. In addition, house price/earnings ratios have moved back up in recent months.
Nevertheless, some support for house activity and prices is likely to come from the government announcing in its 24 March budget that it is bringing in a stamp duty holiday for the next two years for first-time buyers on all properties costing up to £250,000.
Consumer Credit in February
The Bank of England is expected to also report on Monday that net consumer credit rose a modest £0.2 billion in February. This would be down from an increase of £0.5 billion in January, which was the largest rise in unsecured consumer credit since November 2008. Indeed, there were five successive months of net repayments through to November 2009. It may well be that consumers borrowed more in December and January to finance spending over the Christmas period and in the January sales (although retail sales were actually badly hit in January by the weather).
Despite rising modestly recently, net consumer credit is still very low compared with past norms. This seems likely to remain the case for some time to come given the ongoing desire of many households to reduce their debt in the face of a still pretty worrying economic environment, low consumer appetite for new borrowing, and ongoing limited availability of unsecured credit from banks. 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.
Consumer Confidence in March
The GfK/NOP consumer confidence index (out overnight Tuesday/Wednesday) is expected to have modestly extended its recent improvement by climbing to -13 in March from -14 in February and -19 at the end of 2009. This would be the equal highest level (with October 2009) since January 2008. Confidence is expected to have been lifted by increased optimism over the economy, supported by recent data and survey evidence suggesting that activity rebounded appreciably in February from January's weather-related hit. News that the economy expanded 0.3% q/q in the fourth quarter of 2009 rather than by just 0.1% q/q as earlier reported should also have lifted recovery hopes. Even so, consumer confidence is still relatively soft given that the long-term average for the consumer confidence index is -8.
Manufacturing Activity in March
The manufacturing purchasing managers' index survey (PMI; out Thursday) is expected to show that the sector expanded in March at a similar rate to February. Specifically, we forecast the PMI to have edged up to a new 15-year high of 56.8 in March from 56.7 in both February and January. This would be well above the critical 50.0 level that indicates expanding activity. The Confederation of British Industry (CBI) has already released a reasonably healthy industrial trends survey for March, although it was marginally weaker overall compared with February.
The overall impression coming through is that manufacturers are currently seeing a reasonable but unspectacular pickup in activity after a largely dire 2009 as they benefit from leaner stock levels, improved competitiveness in both domestic and foreign markets stemming from the weak pound, and recently firmer demand in key overseas markets. Soft domestic demand is a concern, though. Furthermore, serious uncertainties remain about the strength of demand for manufactured goods over the medium term, particularly once stimulative measures start being withdrawn.
29 Mar - Bank of England Consumer Credit, February (GBP/Billion): +0.2
29 Mar - Bank of England Net Lending Secured on Dwellings, February (GBP/Billion): +1.2
29 Mar - Bank of England Number of Loan Approvals for House Purchase, February (000s): 48.5
30 Mar - Nationwide House Prices, March (Month-on-Month): +0.0%
30 Mar - Nationwide House Prices, March (Year-on-Year): +8.0%
30 Mar - GDP, Fourth-Quarter 2009 (Quarter-on-Quarter): +0.4%
30 Mar - GDP, Fourth-Quarter 2009 (Year-on-Year): -3.2%
30 Mar - GfK Consumer Confidence, March: -13
1 Apr - Manufacturing Purchasing Managers' Index, March: 56.8