Manufacturing Purchasing Managers' Survey for May
The manufacturing purchasing managers' index (PMI; out Wednesday) is expected to show that the sector saw activity stabilizing in May after recently losing momentum from the peak levels seen early in 2011 and in the second half of 2010. Specifically, we forecast the PMI to come in at 54.7 in May. This would be little changed from the six-month low of 54.6 seen in April and down from 56.7 in March and a record high of 61.2 in January. Nevertheless, it would still be well above the 50.0 level that indicates only flat activity.
Manufacturers have been benefiting from decent orders both at home and overseas, the competitive level of the pound, and an ongoing rebuilding of stocks after they had been slashed during the recession.
Nevertheless, there are signs that manufacturers are now starting to find life more challenging as stock rebuilding wanes and tighter fiscal policy weighs down on domestic demand. Meanwhile, high oil prices and other elevated input costs are causing problems for manufacturers by substantially squeezing their margins and putting pressure on them to raise prices and risk losing business. In addition, events in Japan are causing problems for some manufacturing sectors through causing supply-chain disruptions. The Society of Motor Manufacturers and Traders reported that UK car output fell 12.2% in April as production of vehicles and engines was hit by shortages in parts coming from Japan.
On a positive note for manufacturers, global economic activity currently still looks decent and supportive to foreign orders. There is the risk that global growth could be hit by extended high oil prices. There is also the ongoing risk that recurrent sovereign debt problems in the Eurozone could dampen orders from key UK overseas markets.
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 dipped to 47,000 in April, after rising to a five-month high of 47,557 in March from 46,708 in February and a 21-month low of 42,859 in December. Mortgage approvals may have been held back to a limited extent in April by the extra bank holiday for the royal wedding and by the later Easter. Even allowing for any impact from those factors, though, mortgage approvals are likely to have remained very low compared with long-term norms. Mortgage approvals have actually averaged around 90,000 a month since 1993, while a level of 70,000–80,000 has been considered consistent with stable house prices in the past.
The Bank of England is also forecast to report that net mortgage lending amounted to just GBP1.0 billion in April. While this would be up just GBP0.4 billion in March, it would also still be very low compared with long-term norms. This is expected to be the consequence of 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.
Meanwhile, the Halifax lender is expected to report during the week that house prices edged up 0.2% month-on-month (m/m) in May following a drop of 1.4% in April. This would cause prices to be down 4.1% year-on-year (y/y) in the three months to May (the Halifax prefers to highlight the three-month y/y house price rate to smooth out erratic movements).
We suspect that 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 maintains 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, low 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 norm; however, the house price/earnings ratio is above its long-term average.
On balance, we believe that house prices are likely to end up declining by some 10% overall by the early months of 2012 from their 2010 highs. This implies that they will fall around 5–8% from current levels depending on which house price measure you take.
Consumer Credit in April
The Bank of England is also expected to report on Wednesday that unsecured consumer credit rose a modest GBP0.3 billion in April. This would be up from an increase of GBP0.1 billion in March and likely lifted by people financing increased spending in April (when retail sales spiked 1.1% m/m as they were lifted by the later Easter this year, the royal wedding, and good weather).
Consumer credit remains very low compared with long-term norms. The overall impression continues to be that consumer appetite for taking on new borrowing remains limited while there is also an ongoing desire of many consumers to reduce their debt. Consumer desire to get a tighter grip on their finances is a reflection of current 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. Meanwhile, there remains limited availability of unsecured credit from banks, despite reportedly increasing slightly in the first quarter.
The likelihood that interest rates will start rising sometime in the second half of 2011 is a further incentive for consumers to try to limit their borrowing and improve their finances. Even a small rise in interest rates could cause trouble for many people.
Construction Activity in May
Major uncertainty continues over the true state of the construction sector. The revised national accounts data for the first quarter of 2011 trimmed the contraction in construction output to 4.0% quarter-on-quarter (q/q) from the previously reported drop of 4.7% q/q, but this still seems a substantially weaker performance than indicated by the survey evidence from the purchasing managers. This indicates that construction activity bounced back pretty well in the first quarter, although it remained appreciably below the peak levels seen around mid-2010. Both the hard data and the survey evidence on the construction sector need to be treated with caution at the moment.
Given these provisos, we forecast the construction PMI (Thursday) to have essentially stabilized at 53.5 in May, after receding to a four-month low of 53.3 in April from 56.4 in March and an eight-month high of 56.5 in February. This would indicate clear growth, albeit well below the peak levels seen in the second and third quarters of 2010, as a reading above 50.0 is supposed to indicate expansion.
We believe that the 4.0% q/q reported contraction in construction output in the first quarter of 2011 significantly understates the sector's performance— even allowing for the possibility that there was some carry-over impact from December's weather-related slump in activity. We believe that there remains a very real possibility that the first-quarter 2011 construction output figure will eventually be revised up significantly, and we suspect that the construction sector will show decent expansion in the second quarter.
Nevertheless, the construction sector clearly faces a challenging environment, which is likely to limit activity over the coming months.In particular, the coalition government's extended pruning of public spending will clearly limit expenditure on public buildings, schools, hospitals, and infrastructure (even though the government is keen to prioritize some infrastructure projects). Furthermore, housing market activity is still very weak compared with long-term norms, house prices are soft, and the outlook for the sector remains worrying, so this could well weigh down significantly on house building as was indicated by the renewed contraction in house building activity in April reported in the purchasing managers' survey. Meanwhile, current soaring input costs are squeezing margins in the sector, particularly as pricing power still appears to be limited.
Service Sector Activity in May
The business activity index of the service sector PMI (Friday) is expected to indicate that service sector expansion was stable at a reasonable but hardly buoyant level in May. Specifically, we forecast the business activity index to have risen modestly to 54.5 in April, after falling to a four-month low of 54.3 in March from a 13-month high of 57.1 in March. A reading above 50.0 indicates expansion, below 50.0 shows contraction.
Service sector activity saw a decent if unspectacular rebound in the first quarter of 2011, after being hit appreciably by December's severe weather. The national accounts data for the first quarter of 2011 show that services output rose 0.9% q/q after contracting 0.6% q/q in the fourth quarter of 2010. It appears that there was a lift to services activity in the early months of 2011 from government bodies spending any spare cash before the ending of the fiscal year in early April and the introduction of tighter spending plans.
While business and professional services currently seem to be doing reasonably well, the concern is that services sector activity will be limited by muted consumer spending and the cutbacks in government spending. This was certainly the impression emerging from the May quarterly Confederation of British Industry (CBI) survey on the services sector. This reported that "while business and professional services saw another quarter of modest growth in both volume and value of trade, consumer services firms saw an unexpectedly sharp decline in both." In addition, the Bank of England's regional agents found in their May survey that "turnover in professional and financial services continued to grow at a modest pace…that reflected positive growth in demand from the private sector, while public sector work continued to decline." Meanwhile, the agents found that "demand for consumer services had…softened."
1 June - Manufacturing PMI, May: 54.7
1 June - Bank of England Consumer Credit, April (GBP/Billion): 0.3
1 June - Bank of England Net Lending Secured on Dwellings, May (GBP/Billion): 1.0
1 June - Bank of England Number of Loan Approvals for House Purchase, May (000s): 47.0
2 June - Construction PMI, May: 53.5
3 June - Service Sector PMI, May: 54.5
During Week - Halifax House Prices, May (Month-on-Month): 0.2%
During Week - Halifax House Prices, May (Year-on-Year): -4.1%