Main U.K. Economic Releases for Week Beginning 27April

Consumers are under increasing pressure from soaring unemployment and markedly slowing wage growth. Indeed, more and more people are facing pay freezes or wage cuts, while overtime payments and bonuses are being reduced. On top of this, consumers are being hit by falling house prices, substantially reduced equity prices and increased debt levels. Furthermore, credit conditions are still tight while many consumers are clearly increasingly retrenching out of choice, reflecting their deep concerns about the economy and jobs. These factors seem bound to hit consumer spending hard over the coming months, significantly outweighing the support to purchasing power coming from substantially reduced mortgage payments for many people, and likely more competitive pricing by retailers. Indeed, low interest rates are having a mixed impact on consumers, as sharply reduced savings rates are hitting many people hard.

Meanwhile, the GfK/NOP consumer confidence index for April (out Thursday) is likely to show sentiment was stable after rising to a nine-month high in March. Specifically, the index rose to -30 in March from -35 in February and -37 in January. Nevertheless, the consumer confidence index was still substantially below the long-term (34-year) average of -7. The all-time low of -39 occurred last July.

The April manufacturing purchasing managers' index (PMI—out on Friday) is expected to show that the rate of contraction in the sector is gradually moderating from very deep levels, helped by the substantial de-stocking that has now occurred. There are also signs that sterling's sharp depreciation is providing limited increased support to foreign orders. Specifically, we forecast the manufacturing PMI to have climbed to 40.5 in April from 39.4 in March and 34.7 in February. Nevertheless, this would still indicate substantial contraction, given that a reading of 50.0 denotes unchanged activity. The manufacturing sector is still being battered by depressed domestic demand, contracting activity in key export markets, intensified competition, worsened cash flows and very tight credit conditions.

The Bank of England is expected to report on Friday that mortgage approvals for house purchases rose to 40,000 in March from 37,937 in February, and a record low of 27,330 in November 2008. There is mounting evidence that house price activity is beginning to pick up to a limited extent in response to the substantial fall in house prices from their 2007 peak levels and markedly reduced mortgage rates. Even so, this would still be a very low level of mortgage approvals compared to long-term norms. Indeed, mortgage approvals averaged 98,000 between 1993 and 2007. In addition, the Bank of England is forecast to report that net mortgage lending amounted to £1.6 billion in March. This would be modestly up from £1.5 billion in February and also up from an average of £1.1 billion for the previous six months. It would still be down massively from £6.0 billion in March 2008.

Meanwhile, the Nationwide lender is forecast to report on Thursday that house prices fell 1.3% month-on-month in April after surprisingly rising 0.9% month-on-month in March. This would leave house prices down 15.7% year-on-year in April.

While we suspect that housing market activity has passed its low point, we expect that the pick up in activity will be both gradual and fitful given ongoing very poor economic fundamentals and still tight credit conditions. Soaring unemployment, muted wage growth, a suspicion that house prices still have some way to fall, and an unwillingness of many people to commit to buying a house when they are so worried about the outlook are all factors that are likely to continue to weigh down on the housing market for some time to come. Furthermore, housing affordability ratios are still above their long-term norms, despite coming down sharply from their peak levels. Meanwhile, it is currently still very difficult for many people to get mortgages, particularly first time buyers—and this situation is likely to improve only gradually. Consequently, we believe that house prices will fall significantly further, although we do expect the rate of decline to moderate gradually over the coming months.

The Bank of England is also forecast to report on Friday that net consumer credit amounted to just £0.1 billion in March, after a very rare net repayment of £0.2 billion in February. Consumer credit is likely to be limited over the coming months by still very tight lending conditions as well as many people increasingly looking to rein in their borrowing. Elevated debt levels, plunging house prices, and sharply weakened equity prices mean that there is a pressing need for many consumers to improve their finances. Furthermore, we suspect that very serious concerns over jobs, the economic outlook, and their pensions will cause people to try to save more, if they can. Consequently, we expect the savings ratio to rise further over the coming months after spiking up to 4.8% in the fourth quarter of 2008 from 1.7% in the third quarter. Higher distressed borrowing seems certain over the coming months (if people can get it), as an increasing number of households struggle in the face of soaring unemployment, as well as deepening pressures on their finances.

By Howard Archer