Mortgage Approvals in November and House Prices in December
The Bank of England is expected to report on Tuesday 4 January that mortgage approvals for house purchases were essentially stable at 47,000 in November compared to 47,185 in October. This would be the lowest level since February 2010 and down from the last peak of 59,215 in November 2009. It was also substantially below the 70,000-80,000 level that in the past has been considered consistent with stable house prices. Mortgage approvals have actually averaged 90,100 a month since 1993.
The Bank of England is also forecast to report that net mortgage lending slowed to just £0.7 billion in November from £1.0 billion in October. This is very low compared to long-term norms and is expected to be the consequence of both muted new mortgage activity as well as people making increased repayments.
Meanwhile, the Halifax lender is expected to release its house price index for December in the first week of January. This is forecast to show that prices fell 0.5% month-on-month. Previous data from the Halifax show that house prices edged down 0.1% month-on-month in November, after rising 1.8% in October and plunging 3.7% in September. A 0.5% drop in house prices on the Halifax measure would leave prices down by 1.5% year-on-year in the three months to December. House prices would actually be down 2.9% year-on-year in December itself (the Halifax prefers to highlight the three-month year-on-year house price rate to smooth out erratic movements).
While we not expect house prices to crash, we do expect them to trend down gradually to lose around 10% from their peak 2010 levels by the end of 2011. This implies that house prices are likely to fall by a further 6% during 2011. 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 favour 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; especially as it is difficult for many people to get a mortgage.
Much will obviously depend on mortgage availability, the amount of houses coming on to the market, and how well the economy holds up as the fiscal squeeze increasingly kicks in. Also critical:when will the Bank of England start to raise interest rates?. Any early interest rate hike in 2011 would be bad news for the housing market; not just the rate rise itself, but also through the impact on potential house buyers' psychology resulting from the fact that they would be facing rising interest rates.
Consumer Credit in November
The Bank of England is also expected to report on Tuesday 4 January that net consumer credit edged up just £100 million in November after rising £287 million in October. Consumer credit has averaged just £89 million a month over the six months to October, which is very low compared to past norms. While there may well have been a limited pick up in the use of credit cards in November, as people started to buy Christmas presents, this was likely countered by an increase in credit card repayments.
Consumer appetite for new taking on new borrowing still appears to be limited while there is an ongoing desire of many consumers to reduce their debt. This is a reflection of current low consumer confidence and 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 remains limited availability of unsecured credit from banks.
Manufacturing Purchasing Managers Survey for December
The manufacturing purchasing managers' survey (PMI - out on Tuesday 4 January) is expected to show that the sector expanded at a decent rate in December, although it may have lost some momentum compared to November due to the bad weather. Specifically, we forecast the PMI to have eased back to 57.0 in December after spiking up to a 16-year high of 58.0 in November. This would still be substantially above the 50.0 level that indicates flat manufacturing activity. The Confederation of British Industry has already released its industrial trends survey for December, which showed the net orders balance climbing to a 30-month high with the export orders balance at a 15-year high. There was also a marked pick up in companies' near-term production expectations. The CBI's survey was released early on in December before the latest dose of very bad weather.
The manufacturing sector seems likely to have achieved further robust growth in the fourth quarter. It is just a shame that manufacturing output only accounts for 12.8% of GDP! Manufacturers largely benefited through 2010 from healthier demand both at home and overseas, improved competitiveness in both domestic and foreign markets stemming from the weak pound and a major rebuilding of stocks after they had been slashed during the recession.
While manufacturing activity currently looks to be on a firm footing, a key question going forward remains how well can manufacturing activity hold up in 2011 as stock rebuilding draws to a close, tighter fiscal policy weighs down on domestic demand, and problems in the Eurozone threaten foreign orders?
Construction Activity in December
The severe December weather has been particularly bad news for the construction sector, which has already been losing significant momentum recently. On balance, we forecast theconstruction purchasing managers index (PMI - out on Wednesday 5 January) to indicate that overall activity stagnated in December and it is very possible that the bad weather could have actually caused construction activity to contract. Specifically, we expect the PMI to have fallen to a 10-month low of 50.0 in December, after edging back up to 51.8 in November from 51.6 in October. The index peaked at 58.5 in May. December's reading, therefore, is seen down to the 50.0 level that indicates only flat activity.
The latest national accounts data showed that output in the construction sector jumped by a further 3.9% quarter-on-quarter in the third quarter after surging 7.0% quarter-on-quarter in the second quarter. As a result, even though the construction sector only accounts for 6.3% of GDP, it contributed 0.2 percentage points to third quarter GDP growth of 0.7% quarter-on-quarter and 0.6 percentage point to second quarter GDP growth of 1.1% quarter-on-quarter.
It is very clear that the economy cannot rely on a major contribution from construction going forward. Construction activity in the second and third quarters was influenced by a number of special factors that are now waning. There was a strong element of catch-up reflecting the fact that the rise in output came off a very low base as the construction sector suffered deep contraction during the recession, while it was also held down at the start of 2010 by the very bad weather. In addition, the construction sector benefited in the second and third quarters from past government stimulus measures.
Indeed, the construction sector appears to be facing an increasingly challenging environment. In particular, construction activity will be hit appreciably by the coalition government's extended pruning of public spending as this is clearly going to hit expenditure on public buildings, schools, hospitals, and infrastructure (even though the government is keen to prioritize some infrastructure projects). Furthermore, housing market activity has been moribund in recent months, house prices are softening and the outlook for the sector is currently worrying, so this could well weigh down significantly on house building. Indeed, the November construction purchasing managers' survey indicated that house building activity contracted for a third month running following 12 months of growth through to August
Service Sector Activity in December
The service sector purchasing managers' index (out on Thursday 6 January) is forecast to show that services expansion slowed modestly in December, partly due to the bad weather. Specifically, we expect the business activity index to have eased back to 52.5 in December from 53.0 in November and 53.2 in October. While this is still appreciably above the 50.0 level which is meant to indicate expanding activity, it is down from levels consistently above 55 seen earlier in 2010.
It is clear that the services sector is already being affected to a limited degree by the cutbacks in government spending. Indeed, belief that service activity is going to be moderate rather than robust going forward is reinforced by the Bank of England's regional agents reporting in their November survey that "services turnover growth had eased a little." Significantly, the agents revealed that some professional and financial service firms are already being affected by "weaker public sector demand for various professional services." This included IT and training consultants, and recruitment and advertising agencies. The regional agents similarly reported in their December survey that services turnover growth had "softened slightly".
4 Jan - Bank of England Consumer Credit, November (GBP/Billion): +0.1
4 Jan - Bank of England Net Lending Secured on Dwellings, November (GBP/Billion): +0.7
4 Jan - Bank of England Number of Loan Approvals for House Purchase, November (000s): 46.5
4 Jan - Manufacturing Purchasing Managers Index, December: 57.0
5 Jan - Construction Purchasing Managers Index, December: 50.0
6 Jan - Service Sector Purchasing Managers Index, December: 52.5
During Week - Halifax House Prices, December (Month-on-Month): -0.5%
During Week - Halifax House Prices, December (3-Month/Year-on-Year): -1.5%