There is serious concern that reported very weak construction output was a major drag on the economy and resulted in a second quarter of GDP contraction, thereby officially putting the economy back into recession. Although the Bank of England has heightened this risk, its members question the accuracy of the construction data, given that most other data and survey evidence point to a modestly expanding economy; it is especially hard to equate a 0.8% quarter-on-quarter increase in retail sales volumes in the first quarter and some recent signs of labour-market stabilization with an economy that is not growing.
GDP in First Quarter 2012
The key release by far during the week is Wednesday’s
initial estimate of first-quarter 2012 GDP. The uncertainty surrounding this
release stems from the performance of the construction sector, which has become
a real wild card in the GDP hand. The recent construction data is so bad that
it prompted a warning from the Bank of England that GDP possibly could have
contracted again in the first quarter of 2012, thereby pushing the United
Kingdom back into recession, given that GDP contracted 0.3% quarter-on-quarter
(q/q) in the fourth quarter of 2011.
The initial estimate of GDP in the first quarter of 2012
is based on the output side of the economy. The general expectation has been
that GDP saw modest growth in the first quarter of 2012, which would mean that
the economy avoided a “double-dip” recession.
We have pencilled in overall GDP growth of 0.2% q/q in
the first quarter, which would result in year-on-year (y/y) growth of 0.4%.
Looking at the economy based on all of the data and survey evidence available
so far for the first quarter, we believe that the economy picked up in January
following the contraction in the fourth quarter of 2011, suffered a dip in
February, but then improved anew in March. Furthermore, the latest news on the
labour market points more to an economy growing modestly rather than
contracting.
Nevertheless, we are far from confident in this forecast,
given that the Office for National Statistics (ONS) has reported overall very
weak construction output during January and February, which threatens to
significantly drag down the overall first-quarter GDP performance even though
the construction sector only accounts for 7.6% of the economy’s total output.
Specifically, unadjusted data from the ONS show that construction output
plunged 10.3% in December 2011 and 12.9% month-on-month (m/m) in January 2012
before growing 6.1% m/m in February (when it may have been held back by bad
weather early in the month). Consequently, construction output was down 15.3%
in the three months to February 2012 compared with the three months to November
2011.
There is considerable scepticism as to whether
construction output really has been this weak, especially as the purchasing
managers’ surveys for the construction sector were relatively healthy overall
for the first quarter and pointed clearly to growth in the sector.
Nevertheless, unless the ONS assumes that there was a surge in construction
output in March or revises up the back data, construction activity will have
been a major drag on GDP in the first quarter.
It is particularly notable that the Bank of England has
expressed serious concern over the construction output data and their potential
impact on the GDP figures. Specifically, the minutes of the April meeting of
the bank’s Monetary Policy Committee reported that “The sharp falls in
construction output in December and January were perplexing, and the Committee
was minded not to place much weight on them, particularly given that other
indicators of construction activity had suggested far more modest declines. The
mechanical impact of the drop in construction output, together with the likely
subsequent loss of activity around the Jubilee bank holiday, could lead the ONS
to report further falls in GDP in both the first and second quarters of this
year. But a wide range of survey indicators pointed to a moderate rate of
growth in activity in the first half of the year and this was supported by
official data on services output. Underlying aggregate activity growth was
likely, if anything, to have picked up since the second half of 2011.”
Industrial production, which was essentially flat overall
during the first quarter, hardly helped GDP growth. This was largely due to a
surprisingly sharp dip in manufacturing output in February.
So if the economy did manage to grow in the first
quarter, it will have needed a decent performance from the dominant services
sector. Here, at least, the news is more encouraging. Specifically, latest
available hard data from the ONS indicate that services output grew 0.2% m/m in
January after increasing 0.3% in December. Furthermore, survey evidence from
the purchasing managers indicate that services activity expanded overall in the
first quarter at the fastest rate since the second quarter of 2010.
In reality, it does not make a huge difference whether
the economy saw modest GDP growth in the first quarter or suffered modest
contraction due to a sharp dip in construction output. In fact, it is very
possible that a modest GDP drop in the first quarter could be initially
reported, and then the data revised later this year to show that modest growth
actually occurred if construction-sector performance is reassessed.
However, in terms of confidence, it would be much better
if the GDP data do show that the economy returned to modest growth in the first
quarter as this will avoid the many headlines that would undoubtedly appear
proclaiming that the United Kingdom has slipped back into recession.
Economic Outlook
Whether or not the economy grew in the first quarter of
2012, it still faces serious domestic and international headwinds, so it could
be vulnerable to relapses over the next few months at least. These headwinds
notably include still markedly squeezed consumer purchasing power, elevated
unemployment, a reluctance of businesses to invest amid 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 currently reinforcing the
headwinds facing the UK economy as they are causing inflation to be sticky
around 3.5% (after it had fallen to this level from a peak of 5.2% in September
2011), thereby maintaining an appreciable squeeze on consumers’ purchasing
power. Elevated oil prices are also squeezing companies’ margins, thereby
threatening to hold back their investment and, possibly, employment plans.
There is also the likelihood that growth in the second
quarter will be held back by the extra 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 squeeze 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 businesses to invest, hopefully helped by an easing of credit
conditions.
Overall, we expect the economy to grow 0.7% in 2012.
Public Finances in March
The public finances data for March (out Tuesday) are
expected to show modest improvement compared with a year earlier following the
disappointing outturn for February. Specifically, we forecast there to have
been a Public Sector Net Borrowing Requirement (PSNBR) excluding financial
interventions of GBP16 billion in March, which would be down from GBP18 billion
in March 2011. This would mean the PSNBR amounted to GBP126.0 billion overall
in fiscal year 2011/12, in line with the estimate given in last month’s budget
and down from a shortfall of GBP136.8 billion in 2010/11.
Part of the improvement in the March public finances data
is expected to be the result of a correction after surprisingly poor February
data. There should also be some benefit from the fiscal consolidation measures
that increasingly kicked in during the year. However, recent weakened economic
activity is likely to have limited the improvement while tax revenues were
already being lifted in March 2011 by the value-added-tax rate being increased
from 17.5% to 20.0%.
In March’s budget, the Chancellor set the target of
reducing the PSNBR modestly further to GBP120 billion in FY 2012/13, with the
reduction limited by anticipated GDP expansion of just 0.8% in 2012 before it
improves to 2.0% in 2013. This looks achievable (although we forecast GDP
growth to be modestly lower at 1.6% in 2013). However, the Chancellor could
very well struggle to meet his longer-term fiscal targets as he is relying on
GDP growth picking up to 2.7% in 2014 and 3.0% in both 2015 and 2016, which
currently looks rather optimistic.
CBI Distributive Trades Survey for April
The Confederation of British Industry (CBI)'s
distributive trades' survey for April (Thursday) will provide the first
indication as to how consumers started off the first quarter. Weekly sales data
from the John Lewis department stores for the first half of April were
encouragingly robust, although bear in mind that while John Lewis has often
been seen as a bellwether for the state of consumer spending, it has been very
much an out-performer in recent times.
We expect the CBI survey to show that the balance of
retailers reporting that sales were up y/y was stable at 0% in April, having
risen to this level in March from -2% in February and a 34-month low of -22% in
January. This would still be just below the overall average of +3% in 2011 and
substantially below the +42% average seen in the second half of 2010.
While the latest news on retail sales is largely
encouraging, the fact remains that there is currently still a lot of pressure
on consumers, so they will likely be cautious overall in their spending over
the next few months at least. With consumer price inflation proving sticky at
3.5% in March, annual earnings growth limited to 1.2% in February, and fiscal
policy tight, the squeeze on purchasing power remains appreciable. Meanwhile,
unemployment is still high and full-time employment is falling modestly,
despite some recent signs of labour-market stabilization.
Hopefully, inflation will eventually fall back
appreciably further and support consumer spending, but this may well be delayed
until the second half of this year. Even if consumer price inflation does
eventually fall back appreciably further, unemployment is likely to remain high
and wage growth muted, so the overall environment will likely still be pretty tough
for consumers.
CBI Industrial Trends Survey for April
We expect the CBI industrial trends survey for April
(Wednesday) to indicate that manufacturing activity got off to a reasonable
start to the second quarter. The latest hard data from the ONS somewhat
surprisingly showed that manufacturing output fell 0.8% m/m in February,
although it still edged up by 0.2% in the three months to February compared
with the three months to November. It is possible that manufacturing output was
hit by very bad weather early in February, and it is notable that survey
evidence largely pointed to modest manufacturing expansion during the first
quarter.
Specifically, we forecast the balance of manufacturers
reporting that their orders are at normal levels to have risen modestly to -5%
in April after dipping to -8% in March from a six-month high of -3% in
February. This would compare to a long-term average of -17% for the balance.
We also expect the April CBI survey to reveal that
manufacturers generally expect to increase production over the next three
months. In March, 24% of companies expected to raise output over the next three
months. This was a 12-month high and up from 15% in February.
While we suspect that the manufacturing sector is in
better shape than was indicated by February’s sharp dip in output, it
nevertheless clearly faces a challenging environment. Domestic demand for
manufactured goods is handicapped by a still-appreciable squeeze on consumers’
purchasing power as well as by tighter public spending. Meanwhile, muted
economic activity in the Eurozone is limiting export orders, although this is
being countered by recently improved demand Southeast Asia, Japan, and Africa
according to the purchasing managers. In addition, the current spike up in
input costs centred on higher oil prices is bad news for manufacturers as it
squeezing their margins and exerting pressure on them to raise prices at a time
when demand is still fragile.
Consumer Confidence in April
The GfK/NOP consumer confidence index (overnight Thursday/Friday)
is forecast to show that sentiment stabilized in April after suffering a
disappointing relapse in March, but remains down at historically very weak
levels. Specifically, we expect the GfK NOP consumer confidence index (which is
carried out on behalf of the European Commission) to have remained at -31 in
April after falling back to this level in March from -29 in both February and
January, which had been the highest level since mid-2011 and up from a 34-month
low of -33 in December. Even in February and January, though, confidence had
been very low compared to long-term norms given that the lifetime average of
the survey’s balance is -8.
Consumer confidence was lifted at the start of 2012
primarily by an easing in pessimism over the economic outlook, but this ground
to at least a temporary halt in March, when people also became markedly more
worried about the outlook for their personal finances.
We expect consumer confidence to have gained some support
in April from a renewed modest easing in concerns over the economic outlook and
the jobs outlook. However, this is likely to have been countered by a generally
negative view of the budget that was held in late March and by concern over
record-high petrol prices.
House Prices in April
The Nationwide lender is expected to report during the
week that house prices rose 0.2% m/m in April but were down 0.4% y/y. House
prices on the Nationwide measure fell 1.0% m/m and 0.9% y/y in March after
rising 0.4% m/m in February and dipping 0.3% m/m in both January and December.
There has been quite a bit of volatility in house prices
recently from month to month and between surveys. Most notably, the 1.0% m/m
drop in prices in March reported by the Nationwide measure contrasted with a
2.2% m/m increase reported by the Halifax. However, the Halifax had previously
reported house price falls in five of the previous seven months and their data
still showed house prices down by 0.6% y/y in the three months to March. It is
evident that at least some of the latest volatility in house prices and recent
overall modestly increased housing market activity has been due to first-time
buyers looking to complete house purchases before a stamp-duty concession ended
on 24 March.We currently expect house prices to drift lower over the coming
months, to lose about 3% of their value by the end of 2012. Housing market
activity is still low compared with long-term norms. Regardless of whether the
economy returned to growth in first quarter, the economic fundamentals still
look far from rosy for the housing market, with consumer confidence low,
unemployment high and likely to rise further, earnings growth muted, debt
levels high, and the growth outlook uncertain.
In addition, credit conditions may well tighten, making
it hard for many people to get a mortgage. In fact, some mortgage rates have
risen recently because of lenders’ higher borrowing costs in wholesale markets,
and this could weigh down on housing market activity.
It is possible that house prices will be helped by a
shortage of properties coming on to the market. The latest survey from the
Royal Institution of Chartered Surveyors (RICS) indicated that the balance of
surveyors reporting an increase in instructions to sell slipped back to +2% in
March from +9% in February, although it was still a sixth successive positive
balance. The RICS also reported that average stock per branch fell to 66.5 in
March from 69.5 in February.
The squeeze on consumers’ purchasing power should
eventually ease significantly further as inflation retreats (after being sticky
in the near term due to high oil prices), and this may help house prices to
stabilize later in 2012 along with ongoing very low interest rates and
hopefully a sustainable acceleration in economic activity. Nevertheless, wage
growth looks set to remain muted and unemployment could well rise further so
the overall environment will still be very tough for house buyers.
24 Apr - Public Sector Net Borrowing Requirement, March
(GBP/Bln): 16.0
25 Apr - GDP, First Quarter 2012 (Quarter-on-Quarter):
+0.2%
25 Apr - GDP, First Quarter 2012 (Year-on-Year): +0.4%
25 Apr - CBI Industrial Trends, Total Orders, April: -5
26 Apr - CBI Distributive Trades Reported Volume of
Sales, April: 0%
27 Apr - GfK Consumer Confidence, April: -31
During Week - Nationwide House Prices, April
(Month-on-Month): +0.2%
During Week - Nationwide House Prices, April
(Year-on-Year): -0.4%