The manufacturing purchasing managers' index (PMI) survey (released Tuesday) is expected to show that the sector saw healthy expansion in May, albeit at a modestly reduced rate compared with April. Specifically, we forecast the PMI to have eased to 57.5 in May from 58.0 in April, which was the highest level since September 1994. This would still be substantially above the critical 50.0 level that indicates unchanged activity. The Confederation of British Industry (CBI) has already released a healthy industrial trends survey for May, while latest hard data show that manufacturing output surged 2.3% month-on-month (m/m) in March, which was the strongest rise since July 2002. As a result, manufacturing output expanded 1.2% quarter-on-quarter (q/q) in the first quarter of 2010.Manufacturers are currently clearly benefiting from healthier demand both at home and, particularly, overseas, improved competitiveness in both domestic and foreign markets stemming from the weak pound, and leaner stock levels. The key question is can manufacturers sustain healthy growth over the medium term, particularly as stimulative measures are withdrawn? For example, the car scrappage scheme came to an end in March and a major fiscal squeeze is looming ever larger. United Kingdom manufacturers will certainly be hoping that the Eurozone debt crisis does not derail growth in the region, as there have been signs recently that Eurozone growth has been picking up after faltering around the turn of the year.
Mortgage Approvals in April and House Prices in May
The Bank of England is expected to report on Wednesday that mortgage approvals for house purchases rose modestly to 49,500 in April from 48,901 in March and a nine-month low of 47,876 in February. Even so, this would still be well down from the 21-month high of 59,572 seen in November 2009 and substantially below the 70,000–80,000 level that has in the past been considered consistent with stable house prices. Mortgage approvals have actually averaged 91,533 a month since 1993. The Bank of England is also forecasted to report that net mortgage lending was limited to just £0.8 billion in April. Although up from £0.3 billion in March, this would be below the monthly average of £1.5 billion for the previous six months and extremely low compared with long-term norms.
Meanwhile, house price data for May are released during the week by both the Nationwideand Halifax lenders. The Nationwide is expected to report on Thursday that house prices rose 0.5% m/m in May, which would be half the April increase of 1.0%. This would actually push the year-on-year (y/y) increase in house prices back down to 9.8% in May from 10.5% in April because house prices rose 1.2% m/m in May 2009. In addition, the Halifax is forecasted to report during the week that house prices rose 0.5% m/m in May after edging down 0.1% in April. This would push the y/y increase up to 7.4% in the three months to May from 6.6% in the three months to April. Nevertheless, the y/y increase would actually retreat to 6.6% in May itself from 8.8% in April, reflecting the fact that house prices rose 2.5% m/m on the Halifax measure in May 2009.
We suspect that house prices will struggle to make significant gains over the coming months. Although it may have picked up modestly from its early-2010 lows, housing market activity is limited, economic fundamentals (high unemployment, still-falling employment, low earnings growth, and looming tighter fiscal policy) are 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 favor 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. There are also growing concerns that the Bank of England will have to raise interest rates before the end of the year because of higher-than-expected inflation. Furthermore, if household confidence suffers from widespread significant doubts about the stability and longevity of the Conservative-Liberal Democrat coalition governments, this could hurt 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.
Consumer Credit in April
The Bank of England is also expected to report on Wednesday that net consumer creditrose a modest £0.2 billion in April. This would be down from increases of £0.3 billion in March and £0.6 billion in February, which had been the largest rise since November 2008. Prior to December 2009, there had been five successive months of net repayments through to November 2009.
Given a still-uncertain and fragile economic environment, as well as a looming fiscal squeeze, there appears to be an ongoing desire of many consumers to reduce their debt and also generally low consumer appetite for new borrowing. Meanwhile, there remains only limited availability of unsecured credit from banks.
Construction Activity in May
The construction PMI (Wednesday) is likely to show that overall activity expanded for a third month running in May, but at a slower rate compared with April when activity somewhat unexpectedly surged. We expect the PMI to have retreated to 56.7 in May after surging to a 31-month high of 58.2 in April from 53.1 in March. This took it substantially above the critical 50.0 level that indicates unchanged activity. The index had previously been below the 50.0 level for 23 months up to, and including, February. It even dipped below 30.0 in late 2008/early 2009.
Construction output is on course to grow in the second quarter after contracting 0.5% q/q in the first quarter of 2010 and 0.9% q/q in the fourth quarter of 2009. This is obviously good news for GDP growth prospects in the second quarter, although it needs to be borne in mind that the construction sector only accounts for 6.3% of total output. Nevertheless, while latest survey evidence has raised hopes that constriction is now on the mend after suffering deep, extended recession, the sector still faces a very challenging environment. In particular, it is likely to be hit significantly by the coalition government's need to rein in its spending for an extended period as this is bound to hit expenditure on infrastructure and public buildings.
Service Sector Activity in May
The service sector PMI (Thursday) is forecasted to indicate that activity improved modestly in May, having apparently been hit to a limited extent in April by the flight ban resulting from the Icelandic volcanic ash as well as by Easter occurring during the month. Specifically, we expect the business activity index to have climbed to 55.5 in May, after dipping to 55.3 in April from 56.5 in March. This would take it further above the 50.0 level that indicates unchanged activity.
The service sector currently appears to be seeing much more limited growth than the manufacturing sector. In their May survey, the Bank of England's regional agents reported that "the level of business services turnover remained subdued, although the gradual recovery that had emerged over the past few months had continued." The agents further reported that "consumer services turnover had been broadly flat in recent months" but it "remained higher than a year earlier."
1 Jun - Manufacturing Purchasing Managers' Index, May: 57.5
2 Jun - Bank of England Consumer Credit, April (GBP/Billion): +0.2
2 Jun - Bank of England Net Lending Secured on Dwellings, April (GBP/Billion): +0.8
2 Jun - Bank of England Number of Loan Approvals for House Purchase, April (000s): 49.5
2 Jun - Construction Purchasing Managers' Index, May: 56.7
3 Jun - Service Sector Purchasing Managers' Index, May: 55.5
3 Jun - Nationwide House Prices, May (Month-on-Month): +0.5%
3 Jun - Nationwide House Prices, May (Year-on-Year): +9.8%
During Week - Halifax House Prices, May (Month-on-Month): +0.5%
During Week - Halifax House Prices, May (Year-on-Year): +7.4%