CBI Distributive Trades Survey for March

The Confederation of British Industry (CBI) distributive trades' survey for March (out on Tuesday) will provide the first indication as to whether retail sales picked up during the month after consumers took a breather in February following decent discount-fuelled spending in December and early January. Data from the Office for National Statistics disappointingly revealed that retail sales volumes fell 0.8% month-on-month in February after increases of 0.3% in January and 0.7% in December.

We expect the CBI survey to show that the balance of retailers reporting that sales were up year-on-year rose to 0% in March, from -2% in February. This would still be just below the overall average of +3% in 2011 and substantially below the +42% average in the second half of 2010.

The strength of consumer spending has a major role to play in the economy’s recovery prospects. The concern is that consumers still face challenging conditions that threaten to limit their spending in at least the near term.

On the positive side, consumer price inflation has fallen back appreciably since peaking last September (from a three-year high of 5.2% to 3.4% in February), unemployment is rising at a reduced rate overall, and consumer confidence has come off its late-2011 lows.

Nevertheless, consumers’ purchasing power is still being squeezed appreciably. Despite falling back, consumer price inflation is still running well ahead of earnings growth. Indeed, consumer price inflation of 3.4% in February compared with annual average earnings growth of just 0.7% in January (and 1.4% in the three months to January). On top of this, unemployment is high and still rising, debt levels are elevated, and consumer confidence is still low and fragile compared to long-term norms.

An ongoing retreat in inflation over the coming months will hopefully further dilute the squeeze on consumers, although inflation may be stickier in the near term due to high oil prices. Even if consumer price inflation does fall back appreciably, unemployment is likely to rise further, wage growth looks set to remain muted, and debt levels will still be high, so the overall environment will likely remain tough for consumers.

GDP in Fourth-Quarter 2011

Data on Wednesday are expected to confirm that GDP contracted 0.2% quarter-on-quarter in the fourth quarter of 2011, limiting year-on-year growth to just 0.7%. There seems little reason to expect any major changes to the GDP data.

On the expenditure side of the economy, GDP was dragged down in the fourth quarter by an alarming 5.6% quarter-on-quarter drop in business investment. There were some decent developments in the fourth quarter, with consumer spending growing for the first time since the third quarter of 2010, and by a reasonable 0.5% quarter-on-quarter. In addition, exports saw encouraging growth of 2.3% quarter-on-quarter despite GDP contraction of 0.3% quarter-on-quarter in the Eurozone, which is a key market for UK exporters. It is also notable that GDP would have expanded in the fourth quarter of 2011 but for sharply reduced inventory building.

On the output side of the economy, GDP was dragged down in the fourth quarter of 2011 by a sharp drop in industrial production and a more modest drop in construction. Output in the dominant services sector was flat.

We expect the economy to have returned to modest growth in the first quarter of 2012. Specifically, we have pencilled in expansion of 0.3% quarter-on-quarter, although this is threatened by the marked relapse in retail sales in February. Indeed, it does look overall like the economy has lost momentum after a January spike up in activity.

The economy still faces serious domestic and international headwinds, and it is likely to remain prone to relapses over the next few months at least. These headwinds notably include still-squeezed consumer purchasing power, rising unemployment, a reluctance of business to invest during worrying and uncertain circumstances, tighter credit conditions, reduced public spending and investment, and muted global economic activity (particularly in the Eurozone).

Elevated oil prices are reinforcing the headwinds facing the UK economy, as they threaten to keep inflation higher than hoped for in the near term at least, also squeezing consumers’ purchasing power. Elevated oil prices are also constricting companies’ margins, thereby threatening to hold back their investment and employment plans.

There is also the likelihood that growth in the second quarter will be held back by the extra day’s public holiday for the Queen’s Diamond Jubilee. Overall, we see GDP growth limited to 0.1% in the second quarter.

We expect sustainable modest growth to finally develop from the second half of 2012, supported by the reduced pressure on consumers’ purchasing power coming from lower inflation (assuming that oil prices come off their recent highs), gradually improving global growth, and ongoing ultra accommodative monetary policy. This backdrop should increasingly encourage business to invest, hopefully helped by an easing of credit conditions.

Overall, we expect the economy to grow 0.8% in 2012, which would match the 2011 outturn.

Current-Account Deficit in Fourth-Quarter 2011

The current-account deficit (out Wednesday) is forecast to have narrowed to GBP9.0 billion in the fourth quarter of 2011 after spiking up to a record GBP15.2 billion in the third quarter, from GBP7.4 billion in both the second and first quarters.

The sharp widening in the current-account deficit in the third quarter of 2011 was partly due to the surplus in the net income account plunging to just GBP349 million, from GBP4.6 billion in the second quarter. There was a GBP3.4-billion decline (to GBP42.8 billion) in UK earnings on foreign investments in the third quarter, while foreign earnings on investment in the UK rose by GBP874 million to GBP42.5 billion. In addition, the total trade deficit in goods and services jumped to GBP9.9 billion in the third quarter, from GBP7.2 billion in the second quarter. Finally, the UK’s net deficit in current transfers widened to GBP5.7 billion in the third quarter, from GBP4.7 billion in the second.

We expect the current-account deficit to have narrowed in the fourth quarter as a result of a significantly reduced total trade deficit, as well as a rebound in the surplus on the net income account. Data already released by the Office for National Statistics show that the total trade deficit in goods and services fell markedly to GBP6.4 billion in the fourth quarter.

Mortgage Approvals in February and House Prices in March

The Bank of England is expected to report on Wednesday that mortgage approvals for house purchases moderated to 56,500 in February after climbing to a 25-month high of 58,728 in January from 55,019 in December. While mortgage approvals have been lifted recently by first-time buyers looking to complete before a stamp duty concession ends on 24 March, underlying activity appears to remain limited. The British Bankers Association has already released data showing a retreat in mortgage approvals in February from January’s peak level.

Significantly, mortgage approvals remain low compared to long-term norms. Mortgage approvals continue to be substantially below the average monthly level of 87,400 seen since 1993, while a level of 70,000–80,000 has been considered consistent with stable house prices.

The Bank of England is also forecast to report that net mortgage lending amounted to GBP1.5 billion in February. This would be down modestly from GBP1.6 billion in January and would again still be very low compared to long-term norms. Net mortgage lending is being limited both by relatively muted housing market activity and (very likely) by a significant number of house owners looking to take advantage of their savings from low mortgage interest rates to reduce their outstanding mortgage levels and improve their personal balance sheets.

Meanwhile, the Nationwide lender is expected to report during the week that house prices rose 0.2% month-on-month in March and 0.8% year-on-year. House prices on the Nationwide measure rose 0.6% month-on-month in February after dropping 0.3% in January and 0.2% in December. It is likely that house prices have gained recent limited support from first-time buyers looking to complete before the stamp duty concession ends on 24 March.

We believe house prices are more likely than not to drift downwards over the coming months in the face of soft economic fundamentals and still relatively low consumer confidence. Specifically, we expect house prices to fall around 3% by the end of 2012. The housing market remains low compared to long-term norms. Although latest indicators suggest overall that the economy has returned to limited growth in the first quarter, the economic fundamentals still look far from rosy for the housing market, with unemployment high and likely to rise further, earnings growth muted, debt levels high, and the outlook uncertain. In addition, credit conditions may well tighten, making it harder for many people to get a mortgage. In fact, some mortgage rates have risen recently due to lenders’ higher borrowing costs in wholesale markets, which could weigh down on housing market activity

Consumer Credit in February

The Bank of England is also expected to report on Thursday that net unsecured consumer credit was flat in February. Consumer credit rose by GBP148 million in January, which followed a rare net repayment of GBP46 million in December. In January, there was a marginal net repayment of GBP3 million on credit cards following a net repayment of GBP33 million in December. Meanwhile, there was a net increase of GBP151 million in other loans and advances in January after a modest net repayment of GBP13 million in December.

Flat unsecured consumer credit in February is anticipated, as it is evident that consumers’ appetite for taking on new borrowing is very low, while there is also a strong desire by many consumers to reduce their debt. Consumer desire to get a tight grip on their finances is clearly the consequence of still-serious concerns over the outlook for the economy and jobs.

Consumer Confidence in March

The GfK/NOP consumer confidence index (out overnight Thursday/Friday) is forecast to show that sentiment was stable for a second month, running at its highest level since June 2011. Specifically, we expect the GfK NOP consumer confidence index (which is carried out on behalf of the European Commission) to have remained at -29 in March, after originally rising to this level in January from a 34-month low in December. In fact, the index was mired in a -30 to -33 range through the second half of 2011, which were among the lowest readings in the 38-year history of the survey.

Even though it has improved from its December 2011 low, consumer confidence is still very low compared to long-term norms, as the lifetime average of the survey is -8.

Consumer confidence has been lifted from its December 2011 lows primarily by reduced pessimism over the economic outlook. There also seems to have been an overall easing in unemployment concerns. However, confidence was held back in February by consumers’ reduced willingness to make major purchases, which was highly likely the consequence of the ending of many of the post-Christmas clearance sales.

We suspect consumers’ pessimism over the economic outlook may have eased again in March. However, we suspect there may have been significant concern over rising petrol prices, while there may also have been significant uncertainty ahead of the budget. As a result, there may have been a further easing back in consumers’ willingness to make major purchases.