GDP Growth in First-Quarter 2011
We expect national accounts data out Wednesday to confirm that GDP grew a disappointing 0.5% quarter-on-quarter (q/q) in the first quarter of 2011, thereby only reversing the 0.5% GDP contraction suffered in the fourth quarter of 2010. Year-on-year (y/y) growth is also seen unrevised at 1.8% in the first quarter of 2011, which would be up from 1.5% in the fourth quarter of 2010 but down from 2.5% in the third quarter of last year.
There seems no reason at this stage to expect major revisions to the preliminary GDP growth estimate for the first quarter. Data out since the first GDP estimate was released (which was based solely on the output side of the economy) shows that construction output fell less than first estimated in the first quarter (by 4.0% q/q rather than by 4.7% q/q) but this was countered by industrial production rising by less than first estimated (up 0.2% q/q rather than 0.4% q/q). These revisions essentially cancel each other out. While we (like many other analysts) still have major doubts that construction output contracted as much as reported in the first quarter, this is an issue that will not be resolved at this stage.
On the expenditure side of the economy, we expect net trade to have made a decent positive contribution to growth as exports grew more than imports. Meanwhile, total investment may well have rebounded to a limited extent in the first quarter after contracting 1.8% q/q in the fourth quarter of 2010 when business investment stagnated.
Consumer spending likely saw pretty muted growth in the first quarter as retail sales volumes increased just 0.3% q/q and spending on services appears to have been limited overall. Consumers' purchasing power is being squeezed hard by elevated inflation and muted wage growth, while they also face high unemployment, elevated debt levels, and a weak housing market. Meanwhile, it is very possible thatinventories made a negative contribution to first-quarter GDP after being built up markedly in the fourth quarter of 2010 (when they added 0.5 percentage point to growth).
The muted first-quarter rebound in GDP growth reinforces our suspicion that growth will be limited going forward as the fiscal squeeze increasingly kicks in, some temporary growth drivers wane (notably restocking), and consumers limit their spending in the face of serious headwinds, most notably the major squeeze on their purchasing power. Specifically, we project GDP growth to be limited to around 0.4% q/q through the second-to-fourth quarters of 2011. This is seen resulting in overall GDP growth of 1.4% in 2011.
Public Finances in April
The public finances data for April (Tuesday) are expected to show modest improvement compared with a year earlier at the start of fiscal year 2011/12. Specifically, we expect the Public Sector Net Borrowing Requirement (PSNBR) excluding financial interventions to have narrowed to GBP6.5 billion in April from a shortfall of GBP7.2 billion in April 2010.
The economy's improved overall economic performance through the past year should have lifted tax receipts compared with April 2010, while the further increase in value-added tax (VAT) from 17.5% to 20.0% in January will also have helped matters. Meanwhile, public expenditure cuts are supposed to have increasingly kicked in from April. In addition, net government investment is now declining compared with a year earlier reflecting the ending of past stimulus measures.
Chancellor George Osborne is looking to reduce the PSNBR excluding financial interventions to GBP122 billion in 2011/12 from the 2010/11 outturn of GBP141.4 billion, but this looks challenging given the headwinds facing the economy. The chancellor's 2011/12 PSNBR target is based on the economy growing 1.7% in 2011 and 2.5% in 2012. IHS Global Insight believes this is on the optimistic side as we expect GDP growth to be 1.4% in 2011 and 2.2% in 2012. Furthermore, higher-than-expected inflation is posing a threat to the chancellor's budget targets.
CBI Distributive Trades Survey for May
The Confederation of British Industry (CBI)'s distributive trades' survey for May (Tuesday) is expected to show that sales softened markedly after being lifted in April by a particularly favorable combination of factors: the later Easter this year, much-improved weather, and the royal wedding. Specifically, we forecast the survey to show that the balance of retailers reporting that sales were up y/y have fallen sharply to +8% in May after improving to +21% in April from +15% in March and an eight-month low of +6% in February. Significantly, weekly sales data for the first two weeks of May from John Lewis point to consumer retrenchment.
April's pickup in retail sales was driven by special factors, and the underlying impression remains that consumers have become significantly less willing, and able, to spend in recent months in the face of serious headwinds—most notably the squeeze on their purchasing power coming from high inflation and low wage growth. In addition, concerns over jobs, the economy, personal finances, and fiscal tightening increasingly kicking in from April (for example, employees' national insurance contributions have risen) are also clearly weighing down on consumer confidence and willingness to spend. Meanwhile, the weak housing market has adverse repercussions for consumer spending (a healthy housing market activity boosts demand for carpets, fittings, and furnishings as well as major household appliances while rising house prices can have a significant wealth effect).
Furthermore, many consumers are likely worried that the Bank of England will start to raise interest rates in the not-too-distant future.Even if the Bank of England only edges interest rates up, it will affect consumer psychology as people are bound to see the move as the first in a series of hikes.
Mortgage Approvals in April and House Prices in May
The British Bankers Association is expected to report on Wednesday that mortgage approvals for house purchases rose modestly to a nine-month high of 32,000 in April, from 31,660 in March and the 23-month low of 29,161 suffered in December 2010. Nevertheless, this needs to be put into perspective—it would still be very low compared with past norms and at a level usually associated with falling house prices. In fact, at 32,000 in April, mortgage approvals would still be only 55% of the average monthly level of 57,824 seen since 1997.
Meanwhile, the Nationwide lender is expected to report on Friday that house prices were flat month-on-month (m/m) in May, after edging down 0.2% m/m in April. This would leave house prices down 1.7% y/y in April.
We suspect that further modest falls in house prices are more probable than not over the coming months as tighter fiscal policy and the possibility of gradually rising interest rates before the end of 2011 maintain pressure on the housing market. On top of that, high unemployment, negative real income growth, elevated debt levels, and still-significant difficulties in getting a mortgage (particularly for first-time buyers) do not bode well for house prices. Furthermore, very low and currently falling consumer confidence will make many people reluctant to risk buying a house. Meanwhile, although housing market activity has edged off its lows recently, it is still at a very weak level that historically has been associated with falling house prices.
Some support to house prices could come if the number of properties coming on to the market is limited over the coming months. The modest help provided to first-time buyers in the March budget is too small to provide major support to the housing market. Meanwhile, affordability measures are mixed. On the favorable side, mortgage payments as a percentage of disposable income are currently very low compared with past norms. Nevertheless, the house price/earnings ratio is above its long-term average.
On balance, we believe that house prices are likely to end up declining some 10% overall by the early months of 2012 from their 2010 highs. This implies they will fall by around 5–7% from current levels depending on which house price measure you take.
Consumer Confidence in May
The GfK/NOP consumer confidence index (overnight Wednesday/Thursday) is forecasted to have remained mired at the lowest level since early 2009 in May. Specifically, we expect the index to remain at -31 in May, having sunk to this level in April from -28 in March, -21 at the end of 2010, and -18 in May 2010. This would keep the index substantially further below its long-term average of -8. In fact, the index is currently at one of its lowest levels in its 37-year history.
We expect consumer confidence to have remained under serious downward pressure in May from major concerns over the economic outlook, jobs, and inflation. Consumers are also likely to have been worried about the possibility that interest rates could start rising soon and by the increasing fiscal squeeze.
24 May - Public Sector Net Borrowing Requirement, April (GBP/Bln): 6.5
24 May - CBI Distributive Trades Reported Volume of Sales, May: +8%
25 May - GDP, First Quarter 2011 (Quarter-on-Quarter): +0.5%
25 May - GDP, First Quarter 2011 (Year-on-Year): +1.8%
25 May - Business Investment, First Quarter 2011 (Quarter-on-Quarter): +0.5%
25 May - Business Investment, First Quarter 2011 (Year-on-Year): +4.7%
25 May - British Bankers Association Number of Loan Approvals for House Purchase, April (000s): 32
26 May - GfK Consumer Confidence, May: -31
27 May - Nationwide House Prices, May (Month-on-Month): 0.0%
27 May - Nationwide House Prices, May (Year-on-Year): -1.7%