The Confederation of British Industry (CBI) distributive trades' survey (out Tuesday) is expected to show that sales weakened further in September as consumers' finances remained under serious pressure and they were increasingly worried about the economy and jobs. Specifically, we forecast the survey to show that the balance of retailers reporting that sales were up year-on-year (y/y) have fallen to a 16-month low of -15% in September, after plunging to -14% in August, from -5% in July and +21% in April. The balance is substantially below the average level of +42% seen in the second half of 2010.
It is likely consumers will be even more careful in their spending as already-weak confidence is hit by heightened concerns over the economy, jobs, and financial market turmoil. Furthermore, the serious squeeze on consumers’ purchasing power is continuing as they face elevated inflation, muted wage growth, and fiscal tightening. Consumer price inflation climbed to 4.5% in August and is likely to move higher still in the near term because of rising utility prices. Meanwhile, latest data show annual underlying average earnings growth was limited to just 1.7% in July.
The only really good news for consumers is that it is clear the Bank of England is not going to raise interest rates for some considerable time to come. Further out, inflation is expected to fall markedly in 2012, which will ease the squeeze on consumers’ purchasing power, but the overall environment will still be tough for them.
Mortgage Approvals in August and House Prices in September
The Bank of England is expected to report on Thursday that mortgage approvals for house purchases edged up to a 15-month high of 49,500 in August. Mortgage approvals rose modestly to 49,239 in July from 48,500 in June and a four-month low of 45,855 in April.
While mortgage approvals have risen modestly from the lows seen earlier this year, they remain 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 in the past been considered consistent with stable house prices.
The Bank of England is also forecasted to report that net mortgage lending amounted to GBP0.8 billion in August. This would be marginally up from GBP0.7 billion in July, but again still very low compared with long-term norms. Net mortgage lending is being limited both by muted housing market activity and (very likely) by house buyers looking to take advantage of low mortgage interest rates to reduce their outstanding mortgage levels to improve their personal balance sheets.
Meanwhile, the Nationwide lender is expected to report during the week that house prices fell 0.2% month-on-month (m/m) in September after dipping 0.6% in August. This would leave house prices down 0.7% y/y in September.
While housing market activity has edged up from its lows recently, there remains little sign of any real step-up. Housing market activity remains weak compared with long-term norms, and we suspect house prices will drop around 5% overall from current levels by mid-2012 as persistently weak economic fundamentals outweigh extended low interest rates. Current heightened concerns over the domestic and global economies, and turmoil in financial markets, are unlikely to do much for consumer confidence and willingness to commit to buying a house in the near term!
Specifically, we suspect consumers’ squeezed purchasing power, tightening fiscal policy, a softening labor market, and worries over the economic outlook will limit potential buyers and weigh down on house prices. On top of that, there still seem to be significant difficulties in getting a mortgage for many people, notably including the need to raise high deposits (particularly for first-time buyers).
These factors are seen outweighing the support to house prices coming from extended very low interest rates. In fact, it currently looks highly likely the Bank of England will hold off from raising interest rates until 2013.
Consumer Credit in August
The Bank of England is also expected to report on Thursday that unsecured consumer credit rose by a modest GBP200 million in August. This would be in line with July’s increase of GBP205 million, which was the lowest level since January and down from an increase of GBP378 million in June. In July, credit card lending rose GBP259 million, while there was a repayment of GBP54 million in other loans and advances.
Muted unsecured consumer credit indicates consumer appetite for taking on new borrowing is low while many consumers strongly want to reduce their debt. Consumer desire to get a tighter grip on their finances is the consequence of current very low and falling consumer confidence, which reflects heightened concern over the outlook for the economy and jobs. Meanwhile, there remains limited availability of unsecured credit from banks.
It is likely, though, some people are having to borrow more to help finance their spending, due to the extended squeeze on their purchasing power coming from high inflation, low wage growth, and tighter fiscal policy.
Consumer Confidence in September
The GfK/NOP consumer confidence index (overnight Thursday/Friday) is forecast to show that sentiment weakened for a fourth successive month in September to be at a 33-month low. Specifically, we expect the GfK NOP consumer confidence index (which is carried out on behalf of the European Commission) to have fallen to -33 in September from -31 in August, -30 in July, and -21 in May. In fact, this would be one of the lowest readings seen in the 37-year history of the survey and substantially below its long-term average of -8.
We expect already very weak consumer confidence to have taken a further hit in September from the steady stream of poor economic news fuelling concerns over the current state of the economy and the outlook. This is also likely to have led to increased pessimism over job prospects. In addition to the worrying UK economic news, consumers are likely to have been perturbed by global financial market turmoil and the heightened Eurozone sovereign-debt crisis.