Manufacturing Purchasing Managers’ Survey for April

The manufacturing purchasing managers' index (PMI; out Monday) is expected to show that overall activity in the sector expanded modestly in April. Specifically, we forecast the PMI to have edged down to 52.0 in April after rising to a 10-month high of 52.1 in March from 51.5 in February. This would still keep the index clearly above the critical 50.0 level that indicates flat activity.

The Confederation of British Industry (CBI) has already released its industrial trends survey for April, which was broadly encouraging and indicates that manufacturing activity got off to a reasonable start to second quarter of 2012. It needs to be borne in mind that the survey evidence for the manufacturing sector has recently been appreciably better than the hard data.For example, the PMI averaged 51.8 in the first quarter of 2012, which is comfortably above the 50.0 level that indicates flat activity, yet the preliminary first-quarter GDP data show that manufacturing output fell 0.1% quarter-on-quarter (q/q).

While we expect the purchasing managers’ survey to indicate that manufacturing is expanding modestly early in the second quarter, the sector clearly still faces significant challenges. Domestic demand for manufactured goods is still handicapped by an 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 from other markets including Asia. In addition, recently higher input prices are bad news for manufacturers as they are squeezing their margins and putting pressure on them to raise prices at a time when demand is still fragile.

Mortgage Approvals in March and House Prices in April

The coming week sees a plethora of housing market data and surveys. The Bank of England is expected to report on Wednesday that mortgage approvals for house purchases moderated to a 10-month low of 47,000 in March from 48,986 in February and a 25-month high of 57,899 in January. Mortgage approvals are expected to have receded further after being lifted towards the end of 2011 and early in 2012 by first-time buyers looking to complete before a stamp-duty concession ended on 24 March.

Significantly, mortgage approvals are very low compared with long-term norms. Mortgage approvals have averaged 87,400 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 forecast to report that net mortgage lending amounted to GBP1.5 billion in March. This would be up modestly from GBP1.2 billion in February, but would again still be very low compared with long-term norms.

Meanwhile, the Nationwide lender is expected to report during the week that house prices rose 0.2% month-on-month (m/m) in April but were down 0.4% year-on-year (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.

House prices on the Halifax lender’s measure (also out during the week) are expected to have been flat m/m in April after jumping 2.2% in March. This would see prices up 0.4% y/y in the three months to April. Prior to March’s spike in prices, the Halifax had reported house price falls in five of the previous seven months.

There has been quite a bit of volatility in house prices recently from month to month and between surveys. Looking through this, we believe that house prices are more likely than not to drift downwards over the coming months in the face of soft economic fundamentals and low consumer confidence. Specifically, we expect house prices to fall by around 3% by the end of 2012.

Housing market activity is very low compared with long-term norms. And the economic fundamentals still look worrisome for the housing market with unemployment high and likely to rise further, earnings growth muted, and the outlook uncertain. The housing market may well be hit by heightened consumer concern over the economic outlook following the news that the UK is officially back in recession with GDP contracting 0.2% q/q in the first quarter.

It is also possible that housing market activity and prices will be softer in the near term as a result of the stamp-duty concession having brought forward a significant amount of first-time buyer activity.

In addition, relatively tight credit conditions may well make 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 well weigh down on housing market activity.

The squeeze on consumers’ purchasing power should eventually ease significantly further as inflation retreats (inflation is likely to be sticky in the near term due to high oil prices), and this may help house prices to stabilize late in 2012, along with ongoing very low interest rates and hopefully a sustainable pickup in economic activity. However, 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.

Unsecured Consumer Credit in March

The Bank of England is also expected to report on Wednesday that net unsecured consumer credit increased by a still relatively modest GBP500 million in March. This would be up from GBP381 million in February. In February, there was a modest net repayment of GBP41 million on credit cards following a net repayment of GBP17 million in January. This was the fourth successive modest net repayment on credit cards. Meanwhile, there was a net increase of GBP422 million in other loans and advances in February after a rise of GBP216 million in January.

A modest rise in unsecured consumer credit in March is anticipated as there was a marked jump in retail sales during the month. Even so, unsecured consumer credit remains very low compared with long-term norms, and it is apparent that consumer appetite for taking on new borrowing is still limited while many consumers want to reduce their debt. Consumer desire to keep a tight grip on finances is clearly the consequence of still-serious concerns over the outlook for the economy and jobs.

Construction Purchasing Managers’ Survey for April

There is currently massive uncertainty over the true state of the construction sector and its reported major weakness in the first quarter was a significant factor in GDP contracting 0.2% q/q, thereby putting the UK officially into recession again. Specifically, the Office for National Statistics estimated that construction output plunged 3.0% q/q in the first quarter.

In sharp contrast, recent surveys on the construction sector have been pretty healthy and a number of construction companies have also stated that they cannot identify with the reported weakness in the hard data. The purchasing managers’ business activity index for the construction sector averaged 54.1 in the first quarter of 2012, which is substantially above the 50.0 level that is meant to indicate flat activity.

So, a great deal of caution has to be attached at the moment when looking at both the hard data and the surveys for construction activity. For what it is worth, we forecast the PMI (Wednesday) to have eased to a still relatively healthy 55.0 in April, after it spiked to a 21-month high of 56.7 in March from 54.3 in February. Construction activity was helped in March by very favorable weather, but decent incoming new business should have supported activity in April.

We suspect construction activity is appreciably healthier than is indicated by the reported first-quarter contraction of 3.0% q/q and a number of companies have reported a pickup in orders.

Nevertheless, the construction sector still faces significant headwinds that are likely to limit the upside for activity. In particular, the government’s spending cuts are limiting overall expenditure on public buildings, schools, and hospitals. On top of this, house building activity is likely to be constrained by persistently weak housing market activity, soft prices, and a still-uncertain outlook. If the economy struggles for sustained growth over the coming months, there is the danger that construction activity will be hit by some projects being put on hold or cancelled altogether.

On a positive note, the construction sector could eventually benefit appreciably from various government measures aimed at boosting infrastructure and house-building. Nevertheless, it remains to be seen just how much of a boost these measures provide and how soon they really kick in.

Service Sector Purchasing Managers’ Survey for April

Unlike construction and manufacturing, the dominant services sector did at least manage to eke out marginal growth in the first quarter of 2012. It was limited to just 0.1% q/q, according to the preliminary national accounts data, which was again an appreciably weaker performance than indicated by much of the survey evidence.

We forecast the business activity index of the service sector purchasing managers' survey (Thursday) to have eased to 54.8 in April after rising to 55.3 in March from 53.7 in February. This would still be well above the 50.0 level that is meant to indicate flat activity.

While the service sector does appear to be clearly growing, its upside is likely to be limited by still-difficult conditions in the private sector and cutbacks in government spending. Meanwhile, many consumer-facing services companies are still being handicapped by the squeeze on consumers’ purchasing power and their need/desire to limit their discretionary spending. Nevertheless, the Bank of England’s regional agents reported in their April summary of business conditions that “there had been a slight increase in the rate of growth of business services turnover, often spurred by sources of growth in the wider economy.” The agents also reported that “there had also been a modest tick-up in activity in consumer services.”