Preview of Major U.K. Economic Releases for the Week Beginning 25 May

There are signs that consumers are becoming a little more prepared to spend as their purchasing power is lifted by sharply lower mortgage payments and lower inflation. The problem remains, though, that consumers are under serious pressure from sharply higher unemployment, markedly reduced earnings growth, heightened debt levels, and falling house prices. Furthermore, credit conditions are still tight while many consumers are keen to retrench because of serious concerns about the economy and jobs, as well as a desire to improve their balance sheets.

Meanwhile, the GfK/NOP consumer confidence index (out Friday) is expected to show that sentiment climbed to a 13-month high in May, as it was lifted by rising hopes that the rate of economic contraction is now slowing substantially and recovery is on the horizon. However, the upside for sentiment may well have been limited by all of the speculation and discussion about how much taxes may have to rise and public spending be cut following the budget in late April and the focus on the deterioration of the public finances. Specifically, we forecast the GfK/NOP consumer confidence index to climb to -25 in May from -27 in April and -37 in January. Nevertheless, the consumer confidence index will still be substantially below the long-term (34-year) average of -7. The all-time low of -39 occurred last July.

The British Bankers Association is expected to report on Wednesday that mortgage approvals for house purchases rose to 29,000 in April from 26,097 in March and a low of 17,895 in November 2008. There is mounting evidence that house price activity has passed its low point and is picking 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 with long-term norms. Meanwhile, the Nationwide lender is forecasted to report during the week that house prices fell by 1.0% month-on-month in May, after dipping just 0.4% in April and surprisingly rising by 0.9% in March. This would cause the y/y fall in house prices to moderate to 13.7% in May, from 15.0% in April and a peak of 17.6% in February.

While we suspect that housing market activity has passed its low point, we expect that the pickup in activity will be both gradual and fitful, given ongoing very poor economic fundamentals and still-tight credit conditions. Sharply rising 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 still very 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 the house price-to-earnings ratio falling to a six-and-a-half-year low of 4.26 in April, from 5.10 in mid-2008 and a record-high 5.84 in mid-2007. Meanwhile, it is currently still very difficult for many people to get mortgages or find the required larger deposits—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. Specifically, we forecast house prices to fall by another 12–15% from their current levels to bottom out around mid-2010. This would leave them some 35% below the peak levels seen around August/September 2007.

By Howard Archer

27 May - British Bankers Association Number of Loan Approvals for House Purchase, April (000s): 29

28 May - CBI Distributive Trades Reported Volume of Sales, May: -12%

29 May - GfK Consumer Confidence, May: -25

During Week - Nationwide House Prices, May (Month-on-Month): -1.0%