GDP in Third-Quarter 2010
We expect the preliminary national accounts data for the third quarter (out Tuesday) to show that GDP growth slowed to 0.4% q/q in the third quarter, which would be only one-third of the 1.2% q/q rate achieved in the second quarter. Nevertheless, q/q growth of 0.4% would lift year-on-year (y/y) expansion to 2.4% in the third quarter from 1.7% in the second quarter.
The preliminary national accounts estimate is based only on the economy's output. Data for July and August suggest industrial production grew around 0.4–0.5% q/q in the third quarter, which would be only half the 1.0% q/q rate achieved in the second quarter. Meanwhile, the service sector appeared to lose momentum in the third quarter. Latest data from the Office for National Statistics indicate that services output actually fell modestly in July, which reduced the three-month/three-month growth rate to 0.5% from a peak of 0.9% in May. Furthermore, survey evidence from the purchasing managers points to relatively modest service sector expansion in the third quarter. In addition, survey evidence indicates the construction sector continued to expand in the third quarter, but at a much reduced rate after output surged 9.5% q/q in the second quarter.
No details will be released on the expenditure side of GDP in the third quarter. Nevertheless, it is apparent that consumer spending lost momentum after expanding 0.7% q/q in the third quarter. It is already known that retail sales growth moderated to 1.0% in the third quarter from 1.6% q/q in the second quarter.
Economic activity seems set to be seriously pressurized over the coming months by major fiscal tightening increasingly kicking in, persistently tight credit conditions, slower global growth, and ongoing significant constraints on consumers.
Consequently, we expect GDP growth to also be limited to 0.4% q/q in the fourth quarter. We assume that there will be a modest boost to growth in the fourth quarter from consumers bringing forward the purchase of some costly, big-ticket items ahead of value-added tax (VAT) rising from 17.5% to 20.0% in January. This would result in overall GDP growth of 1.6% in 2010.
We expect GDP growth to slow to 0.3% q/q in the first quarter of 2011 and then to just 0.2% q/q in the second quarter as the fiscal tightening measures are increasingly enacted, unemployment rises and exports are hit by soft global growth, including a slowdown in the Eurozone. GDP growth is likely to remain muted in the second half of next year—we see it at 0.3% q/q in the third quarter and 0.4% q/q in the fourth quarter. This would result in overall GDP growth of 1.5% in 2011. This is significantly less than forecasted by both the Bank of England and the Office for Budget Responsibility.
Consumer Confidence in October
The GfK/NOP consumer confidence index (overnight Wednesday/Thursday) is forecasted to have retreated markedly to a 14-month low of -23% in October from -20% in September. This would take the index further below its long-term average of -8.
With attention increasingly focusing in recent weeks on the government's spending review, we expect confidence to have taken a serious knock in October from consumers becoming gloomier about the economic outlook and how they will be affected by the fiscal squeeze that will increasingly bite.
CBI Distributive Trades Survey for October
The Confederation of British Industry (CBI) distributive trades survey for October (Thursday) is forecasted to show the balance of retailers reporting that sales were up year-on-year retreated appreciably to +30%, after surprisingly spiking to a more-than-six-year high of +49% in September from +35% in August. While the CBI survey for September was strong, the British Retail Consortium monitor that came out much later in the month was markedly softer. Hard data from the Office for National Statistics show that retail sales volumes fell 0.2% month-on-month (m/m) in September.
There are serious headwinds facing consumers, and it does seem likely that they will find life far from easy over the coming months and will be constrained in their spending.
Consumer confidence is low and falling while the chancellor's spending review highlighted that the substantial fiscal squeeze will increasingly hit public-sector jobs and consumers' pockets. Meanwhile, households already face high unemployment, muted earnings growth, and elevated debt levels. Rising food prices are also limiting the amount of money that poorer consumers in particular have for discretionary spending.
Consumer spending will be hit by VAT rising from 17.5% to 20.0% in January 2011, although this could bring forward some spending to the final weeks of this year as consumers look to make purchases of more expensive items ahead of the VAT increase.
Mortgage Approvals in September and House Prices in October
The Bank of England is expected to report on Friday that mortgage approvals for house purchases declined to 46,000 in September from 47,372 in August and a peak of 59,018 in November 2009. This would be the lowest level since April 2009 and substantially below the 70,000–80,000 level that has been considered consistent with stable house prices in the past. Mortgage approvals have actually averaged 90,500 a month since 1993. The Bank of England is also forecasted to report that net mortgage lending was limited to just £0.7 billion in September. This would be down from £1.7 billion in August and in line with the monthly average of £0.7 billion for the previous six months. It would also be extremely low compared with long-term norms.
Meanwhile, the Nationwide lender will release its house price index for October during the week. We expect this to show that house prices fell 0.5% m/m in October, which would be the third decline in four months, although there was actually a marginal rise of 0.1% in September. This would push the y/y increase in house prices down to 2.1% in October from 3.1% in September and a peak of 10.5% in April.
We expect house prices to trend down relatively gradually over the final months of 2010 and in 2011 to lose around 10% in value. There is likely to be significant volatility around this gradual overall downward trend. High (and likely to rise) unemployment, muted wage growth, an increasing fiscal squeeze, low consumer confidence, difficulties in getting a mortgage, a housing supply/demand balance currently firmly in favor of buyers, and a house price/earnings ratio above long-term norms are a poor combination of factors for house prices. Low interest rates and the current stamp-duty holiday for first-time buyers on all properties costing up to £250,000 only partially offset these adverse factors.
Consumer Credit in September
Friday, the Bank of England is also expected to report that net consumer credit was flat in September following a net repayment of £120 million in August. Consumer credit has averaged just £62 million a month over the past six months, which is very low compared with past norms.
Consumer appetite for new borrowing clearly remains limited while there is an ongoing desire of many consumers to reduce their debt. This is the consequence of an uncertain and somewhat worrying longer-term economic outlook, highlighted by the major fiscal squeeze that will increasingly kick in over the coming months. Meanwhile, there is still limited availability of unsecured credit from banks.
26 Oct - GDP, Third-Quarter 2010 (Quarter-on-Quarter): +0.4%
26 Oct - GDP, Third-Quarter 2010 (Year-on-Year): +2.4%
28 Oct - CBI Distributive Trades Reported Volume of Sales, October: +30%
29 Oct - GfK Consumer Confidence, October: -23
29 Oct - Bank of England Consumer Credit, September (GBP/Billion): 0.0
29 Oct - Bank of England Net Lending Secured on Dwellings, September (GBP/Billion): +0.7
29 Oct - Bank of England Number of Loan Approvals for House Purchase, September (000s): 46
During Week - Nationwide House Prices, October (Month-on-Month): -0.5%
During Week - Nationwide House Prices, October (Year-on-Year): +2.1%