Revised national accounts data on Tuesday are expected to upgrade GDP growth in the first quarter of 2010 to 0.3% quarter-on-quarter from the preliminary estimate of 0.2% expansion. This would cause the year-on-year fall in GDP in the first quarter to be trimmed to 0.2% from 0.3%. Data released since the first estimate show that industrial production in the first quarter actually rose 1.2% quarter-on-quarter rather than by 0.7% as had previously been reported, which in itself would lift overall GDP growth by one percentage point.
The national accounts data will also provide for the first time the breakdown of GDP on the expenditure side of the economy in the first quarter. Data already released show thatbusiness investment rebounded 6.0% quarter-on-quarter after contracting over the previous six quarters, although it was still down 11.0% year-on-year. Meanwhile, more favourable inventory developments and positive government spending and investment are likely to have contributed to growth. Consumer spending could well have contracted given that retail sales contracted by 1.7% quarter-on-quarter in the first quarter as they were hit very hard in January by the bad weather. In addition, value-added tax rose back up from 15.0% to 17.5% in January. Furthermore, trade data suggest that net trade was negative in the first quarter, as imports rose faster than exports.
GDP growth in the first quarter was clearly held back by the bad weather at the start of the year. We expect second-quarter GDP growth to pick up to 0.5-0.6% quarter-on-quarter, as some of the weather-related loss in activity in the first quarter is made up. It also appears overall that the recovery has firmed to a limited extent recently. Even so, overall GDP growth in the second quarter is likely to be slightly dented by the overall hit to activity coming from the flight ban resulting from the Icelandic volcanic ash. There are signs that this hit service sector activity in April.
Further out, we expect recovery to develop only gradually in the face of still major headwinds including fiscal tightening, the Eurozone's problems (which could impact negatively on the United Kingdom in a number of ways, most notably through limiting exports) and the pressure on consumers coming from high unemployment, still-falling employment, muted wage growth, and high debt levels. Consequently, we expect U.K. GDP growth to be limited to 1.1% in 2010.
Mortgage Approvals in April and House Prices in May
The British Bankers' Association (BBA) is expected to report on Tuesday that mortgage approvals for house purchases rose only modestly to 36,000 in April from 34,905 in March and a 10-month low of 33,360 in February. This would still be down appreciably from the 27-month high of 45,823 in December and well below the average monthly level of 59,849 seen since 1997.Meanwhile, the Nationwide lender is expected to report during the week that house prices rose 0.6% month-on-month in May, which would be down from an increase of 1.0% in April. This would actually push the year-on-year increase in house prices back down to 9.9% in May from 10.5% in April, due to the fact that house prices rose 1.2% month-on-month in May 2009. Latest house price data have been somewhat mixed with the Halifax reporting that house prices fell 0.1% month-on-month in April, in contrast to the Nationwide's rise of 1.0%.
We suspect that house prices will struggle to make significant gains over the coming months. Although it may be starting to pick up modestly from its early-2010 lows, housing market activity is limited, the economic fundamentals (high unemployment, still falling employment, low earnings growth and looming tighter fiscal policy) are still far from robust for the housing market, credit conditions remain pretty tight, and house price/earnings ratios have moved back up. Meanwhile, more properties are coming on to the market thereby moving the supply/demand balance more in favour of buyers. This is particularly relevant as a shortage of properties has been a key factor in the recovery in house prices from their early-2009 lows. Furthermore, if household confidence suffers from widespread significant doubts about the stability and longevity of the Conservative-Liberal Democrat coalition governments, this could impact negatively on the housing market.
Some support for house activity and prices will come from the stamp duty holiday for the next two years for first-time buyers on all properties costing up to £250,000. On balance, we believe that house prices are likely to be erratic over the coming months and at best will make very modest gains over the rest of the year. Indeed, we would not be surprised if they were only flat overall through the rest of 2010.
CBI Distributive Trades Survey for May
The CBI's distributive trades survey for May (out on Thursday) is forecast to show that the balance of retailers reporting that sales edged up to +14% in May from +13 in both April and March. In fact, the balance has hovered around +13% since November 2009, with the exception of weather-related distortions in February (+23%) and January (-8%).
The consumer is alive but not kicking particularly hard. Indeed, we suspect that the upside for consumer spending will be limited for some time to come as households still face very challenging conditions. These notably include high unemployment and still falling employment, low underlying earnings growth, elevated debt levels, high fuel prices, and January's value-added tax (VAT) hike from 15.0% back up to 17.5%. Furthermore, overall tax increases are on the way as the coalition government moves to rein in the public finances. This could very well include VAT being raised to 20% (possibly as soon as in the June 22 budget). Meanwhile, still significant uncertainties about the economic outlook and jobs are likely to maintain many consumers' desire to improve their personal finances. It also remains to be seen how consumer confidence will be affected by the formation of the first full coalition government since World War Two. If consumers believe that the coalition is unlikely to last long, the resultant uncertainty may encourage caution over spending. At least though, the Bank of England has indicated that it is unlikely to raise interest rates for many months to come, so low mortgage rates should continue to support consumers' purchasing power.
Consumer Confidence in May
The GfK/NOP consumer confidence index (out overnight Wednesday -Thursday) is expected to have edged up in May after falling modestly overall in April and March, as recent signs of improved U.K. economic activity are countered by still significant political uncertainty following the formation of the coalition Conservative-Liberal Democrat coalition government and concern over the Eurozone debt crisis.
Specifically, we forecast the confidence index to have edged up to -15 in May after dipping to -16 in April from -14 in February. Confidence has actually been rather erratic since the index trended up to a 21-month high of -13 in October 2009 from -37 back in January 2009. The consumer confidence index remains appreciably below the long-term average of -8.
25 May - GDP, First Quarter 2010 (Quarter-on-Quarter): +0.3%
25 May - GDP, First Quarter 2010 (Year-on-Year): -0.2%
25 May - BBA Loans for House Purchases, April: (000s): 36.0
27 May - CBI Distributive Trades Reported Volume of Sales, May: +14%
27 May - GfK Consumer Confidence, May: -15
During Week - Nationwide House Prices, May (Month-on-Month): +0.6%
During Week - Nationwide House Prices, May (Year-on-Year): +9.9%