Mortgage Approvals in January and House Prices in February
The Bank of England is expected to report on Tuesday that mortgage approvals for house purchases were essentially stable at just 43,000 in January after falling sharply to a 21-month low of 42,563 in December from 47,287 in November. This would be 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 around 90,000 a month since 1993. The Bank of England is also forecast to report that net mortgage lending amounted to just GBP500 million in January after a rare net repayment of GBP298 million in December. December's repayment reflected both recent low mortgage activity and a desire of a significant number of homeowners to reduce their debt by paying off more of their mortgages.
Also on Tuesday, the Nationwide lender is expected to report that house prices fell 0.2% month-on-month (m/m) in February, after edging down 0.1% m/m in January. With the exception of December, when prices rose 0.4%, house prices have been falling or flat every month since May 2010 on the Nationwide measure. The year-on-year (y/y) drop in house prices is expected to narrow to 0.2% in February from 1.1% in January (which was the first annual drop since August 2009). This reflects the fact that house prices fell sharply in February 2010.
The Halifax lender is also expected to release its house price index for February during the week. This too is forecasted to show that prices fell 0.2% m/m. Previous data from the Halifax show that house prices rose 0.8% m/m in January, after a sharp 1.1% m/m fall in December. Consequently, house prices were still down 0.7% in the three months to January compared with the three months to October. If house prices fell 0.2% m/m in February, it would cause them to be down 2.5% y/y in the three months to February. House prices would actually be down 1.7% y/y in February itself (the Halifax prefers to highlight the three-month y/y house price rate to smooth out erratic movements).
We expect house prices to trend down gradually in 2011, after losing ground overall in the latter months of 2010. Specifically, we suspect that house prices will fall around 5% in 2011 and end up losing around 10% from the peak levels seen in the first half of 2010. We believe the fundamentals remain largely unfavorable for the housing market, even though recent signs that fewer houses are now coming on to the market could provide significant support for house prices if sustained. Even if fewer houses do come on to the market over the coming months, this is likely to be countered by ongoing low housing market activity, reflecting the pressure on buyers.
The housing market is likely to be pressurized over the coming months by high, likely-to-rise unemployment, negative real income growth, the increasing fiscal squeeze, very low consumer confidence, and ongoing difficulties in getting a mortgage (particularly for first-time buyers).
Further bad news for the housing market is the now very real possibility that the Bank of England will start to raise interest rates within the next few months to counter above-target and rising inflation. Any early interest-rate hike would be bad news for the housing market and likely to weigh down on prices—not just the rate rise itself but also the impact on potential house buyers' psychology resulting from the fact that they would be facing rising interest rates with the prospect of more to come.
Consumer Credit in January
The Bank of England is also expected to report on Tuesday that net consumer credit was essentially flat in January after modest net rise of GBP181 million in December. Credit card lending edged up by GBP41 million in November, while other loans and advances rose GBP140 million.
Flat net consumer credit in January would indicate that consumer appetite for taking on new borrowing remains limited while there is also an ongoing desire of many consumers to reduce their debt. This is a reflection of currently very low consumer confidence and is the consequence of an uncertain and somewhat worrying longer-term outlook for the economy and jobs, as the major fiscal squeeze increasingly kicks in over the coming months. Meanwhile, there remains limited availability of unsecured credit from banks. Growing expectations that interest rates will soon start rising is a further reason for consumers to try to limit their borrowing and improve their finances.
Manufacturing Purchasing Managers' Survey for February
The manufacturing purchasing managers' index (PMI; out Tuesday) is expected to show that the sector enjoyed ongoing robust growth in February. Specifically, we forecast the PMI to have edged up further to a new survey (19-year) high of 62.3 in February, after jumping to 62.0 in January from 58.7 in December. This would take the index substantially above the 50.0 level that indicates flat manufacturing activity. The Confederation of British Industry has already released an upbeat industrial trends survey for February, which included export orders being reported at a 15-year high and manufacturers' production expectations for the next three months being at a 44-month high. Nevertheless, the CBI survey showed that manufacturers are increasingly looking to raise their prices in the face of surging input costs and this is likely to be replicated in the purchasing managers' survey.
Manufacturers have been benefiting from healthier demand, both at home and, particularly, 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 manufacturers look well placed for robust expansion in the near term, the key question is will they be able to sustain this performance as 2011 progresses as stock rebuilding draws to a close and tighter fiscal policy weighs down on domestic demand? While global economic activity currently looks decent, there is the risk that problems in the Eurozone could threaten foreign orders.
Construction PMI for February
Construction activity is expected to have seen modest growth in February as it continued to catch up on some of the activity lost to the severe weather in December. Nevertheless, the rate of growth is expected to have eased following January's significant bounce-back. Specifically, we forecast the construction PMI (Wednesday) to have eased to 52.8 in February, after recovering to a four-month high of 53.7 in January from a 10-month low of 49.1 in December. The index peaked at 58.5 in May 2010. A reading above 50.0 indicates expansion, below 50.0 shows contraction.
Just as December's survey overstated the weakness of the construction sector due to the severe weather, so did January's survey overstate its strength as there was clearly a bounce-back effect. Taken together, the January and December surveys still only indicate modestly expanding construction activity as did the November and October surveys. It is evident that the underlying trend in construction activity has weakened markedly from the peak levels seen in the second and third quarters of 2010.
While the fourth-quarter 2010 contraction in construction output (it declined 2.5% q/q) was heavily influenced by December's severe weather, and it looks like there will be a modest bounce-back from this in the first quarter of 2011, it seems unlikely that the economy will see a major contribution to growth from construction this year.Construction activity in the second and third quarters of 2010 was influenced by a number of special factors that have now largely run their course. 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 2008/09 recession. In addition, the construction sector benefited in the second and third quarters from past government stimulus measures.
The construction sector faces a challenging environment. In particular, construction activity will be hit appreciably by the coalition government's extended pruning of public spending. It will clearly 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 significantly on house building. The January construction purchasing managers' survey indicated that house building activity was essentially only flat after contracting over the previous four months and at the fastest rate in December since April 2009.
Service Sector PMI for February
Service sector activity is expected to have softened slightly in February after seeing a reasonable but unspectacular bounce-back in activity in January from December's weather-influenced weakness. Specifically, we forecast the business activity index of the service sector PMI (Thursday) to have eased to 53.8 in February, after recovering to an eight-month high of 54.5 in January from a 20-month low of 49.7 in December. January's rise took the index well above the critical 50.0 level that indicates flat activity.
While the services sector saw a decent bounce-back in January, it is important to put it into the context that it followed a particularly weak performance in December. The underlying trend is clearly softer compared with the peak levels seen in the first half of 2010. The average for the services business activity index was a pretty modest 52.4 in the three months to January, which is the weakest performance since the three months to July 2009.
It is evident that the services sector is being held back by muted consumer spending, and it also appears that some service suppliers are already being affected to a limited degree by the cutbacks in government spending. The Bank of England's regional agents reported in their February survey that "turnover in consumer services continued to weaken...and pointed to fairly lackluster growth compared with a year earlier." The agents also indicated that growth in the business of professional and financial services firms and in other types of business services was modest. Meanwhile, the CBI's quarterly service sector survey for the first quarter of 2011 indicated that "business and professional services firms managed to grow their business volumes modestly in the past three months," but "business volumes in consumer services fell."
1 Mar - Bank of England Consumer Credit, January (GBP/Billion): 0.1
1 Mar - Bank of England Net Lending Secured on Dwellings, January (GBP/Billion): 0.5
1 Mar - Bank of England Number of Loan Approvals for House Purchase, January (000s): 43.0
1 Mar - Manufacturing Purchasing Managers' Index, February: 62.3
1 Mar - Nationwide House Prices, February (Month-on-Month): -0.2%
1 Mar - Nationwide House Prices, February (Year-on-Year): -0.2%
2 Mar - Construction Purchasing Managers' Index, February: 52.8
3 Mar - Service Sector Purchasing Managers' Index, February: 53.8
During Week - Halifax House Prices, February (Month-on-Month): -0.2%
During Week - Halifax House Prices, February (3-Month/Year-on-Year): -2.5%