Mortgage Approvals in March and House Prices in April
The Bank of England is expected to report on Tuesday that mortgage approvals for house purchases rose only modestly to 49,000 in March after falling to a nine-month low of 47,094 in February, from 48,099 in January and a 21-month high of 59,514 in November. This would still be well below the 70,000-80,000 level that has in the past been considered consistent with stable house prices. The Bank of England is also forecast to report that net mortgage lending moderated to £1.3 billion in March from £1.6 billion in February, which would be modestly below the monthly average of £1.4 billion for the previous six months.
Meanwhile, the Halifax lender is expected to report during the week that house prices rose 0.5% month-on-month in April following a rise of 1.1% in March that failed to fully compensate for the 1.6% drop in February (the first drop in house prices on the Halifax measure since last June). A rise of 0.5% month-on-month in April would cause the year-on-year increase in house prices to firm to 7.0% in the three months to April from 5.2% in the three months to March. The year-on-year increase in house prices would rise to 9.6% in April from 6.9% in March, reflecting the fact that house prices fell 2.0% month-on-month in April 2009. The Nationwide lender has already reported that house prices rose 1.0% month-on-month in April, pushing the year-on-year increase up to 10.5% on its measure.
We suspect that house prices will be erratic over the coming months, and may very well be no better than flat over the rest of the year—particularly if more properties come on to the market, thereby pushing the supply/demand balance more towards buyers from sellers. Latest survey evidence—from the Royal Institute of Chartered Surveyors, Hometrack and Rightmove—all suggest that more properties are indeed now coming on to the market.
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 low 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. 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.
However, some support for the housing sector will come from the government introducing in the March budget a stamp duty holiday for the next two years for first-time buyers on all properties costing up to £250,000.
Consumer Credit in March
The Bank of England is also expected to report on Tuesday that net consumer credit rose by a modest £0.3 billion in March. This would be down from an increase of £528 million in February, which was the largest rise since November 2008, and up from increases of £349 billion in January and £315 billion in December. Prior to December, there were five successive months of net repayments through to November 2009.
The recent modest rises in consumer credit suggest that consumers may have become marginally more prepared to borrow. This needs to be put into perspective. Consumer credit remains very low compared to past norms, and this seems likely to remain the case for some time to come given an ongoing desire of many consumers to reduce their debt in the face of a still pretty worrying economic environment, as well as low consumer appetite for new borrowing and an ongoing limited availability of unsecured credit from banks.
Manufacturing Activity in April
The manufacturing purchasing managers' survey (PMI, out on Thursday) is expected to show that the sector extended its recent improved performance in April. Specifically, we forecast the PMI to have edged up to a new 15-year high of 57.0 in April from 57.2 in March. This would be substantially above the critical 50.0 level that indicates expanding activity. The Confederation of British Industry (CBI) has already released a healthy industrial trends survey for April. The latest national accounts data indicate that manufacturing output expanded 0.7% quarter-on-quarter in the first quarter of 2010, following an increase of 0.8% in the fourth quarter of 2009.
The overall impression coming through is that manufacturers are currently seeing a decent pick up 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 a pick up in demand both at home and overseas. Nevertheless, uncertainties persist over the strength of demand for manufactured goods over the medium term, particularly as stimulative measures are withdrawn. Indeed, the car scrappage scheme came to an end in March.
Construction Activity in April
The construction purchasing managers index (PMI, out on Wednesday) is likely to show that overall activity expanded modestly for a second successive month in April after growing in March for the first time in 25 months. We expect the PMI to be little changed at 53.0 in April after spiking up to 53.1 in March from 48.5 in February. A reading above 50.0 indicates expanding activity. Housebuilding activity has been expanding in recent months, while the March survey indicated that commercial activity expanded for the first time in 25 months. The March survey also showed new construction orders rising at the fastest rate since January 2008, although the increase was still relatively modest.
The latest survey evidence on the construction sector has been better than the hard data. Indeed, the preliminary national accounts data show that construction output contracted 0.7% quarter-on-quarter in the first quarter of 2010.
Hopefully, the construction sector is now turning around after enduring a major recession. Nevertheless, the sector still faces a very challenging environment and it is likely to be hit significantly by the government's need to rein in its spending for an extended period as this is bound to hit expenditure on infrastructure and public buildings. Consequently, construction companies will be desperately hoping that the economy can develop and sustain significant growth over the coming months, and that housing market activity gains momentum.
Service Sector Activity in April
The service sector purchasing managers' index (out on Thursday) is forecast to indicate that activity improved in April. Specifically, we expect the business activity index to have climbed to 57.0 in April from 56.5 in March. This would be the second-highest level (after February) since August 2007 and well above the 50.0 level that indicates unchanged activity.
Although the preliminary national accounts data show that service sector output growth moderated to just 0.2% quarter-on-quarter in the first quarter of 2010 from 0.5% quarter-on-quarter in the fourth quarter of 2009, this was clearly held back by activity being hit very hard in January by the arctic weather conditions. Evidence generally suggests that consumer spending on services has improved to a limited extent recently after contracting during much of 2009. In addition, demand for financial and business services appears to have picked up.
Producer Prices in April
Producer price data (out Friday) are likely to show that output prices rose 0.5% month-on-month and 4.8% year-on-year in April. It does appear that manufacturers are trying to take advantage of recently improved activity to push through some price increases and support their margins in the face of increased input costs. Core producer output prices are forecast to have risen 0.4% month-on-month and 3.6% year-on-year in March. Meanwhile, the consensus is for producer input prices to have risen by 1.0% month-on-month in April, thereby causing the year-on-year increase to spike up to 12.9%.
We remain dubious that manufacturers will be ably to significantly lift their prices over the coming months given substantial excess capacity and elevated competition amid still challenging conditions. While the manufacturing sector is currently enjoying much-improved activity compared with much of 2008 and 2009, it still seems unlikely to race ahead over the coming months. Furthermore, the higher producer prices are unlikely to be fully passed on given that still pressurized consumers are likely to be pretty price sensitive over the coming months.
4 May - Bank of England Consumer Credit, March (GBP/Billion): +0.3
4 May - Bank of England Net Lending Secured on Dwellings, March (GBP/Billion): +1.3
4 May - Bank of England Number of Loan Approvals for House Purchase, March (000s): 49
4 May - Manufacturing Purchasing Managers Index, April: 57.5
5 May - Construction Purchasing Managers Index, April: 53.0
6 May - Service Sector Purchasing Managers Index, April: 57.0
7 May - Producer Price Output Inflation, April (Month-on-Month): +0.5%
7 May - Producer Price Output Inflation, April (Year-on-Year): +4.8%
7 May - Core Producer Price Output Inflation (ex Food, Tobacco etc.) April (Month-on-Month): +0.4%
7 May - Core Producer Price Output Inflation (ex Food, Tobacco etc.) April (Month-on-Month): +3.6%
During Week - Halifax House Prices, April (Month-on-Month): -0.5%
During Week - Halifax House Prices, April (Year-on-Year): +7.0%