Preview of Main U.K. Economic Releases for Week Beginning 29 June

Much attention will be focused on the household savings ratio in the first quarter. This jumped to 4.8% in the fourth quarter of 2008 from 1.7% in the third quarter and a low of -1.2% in the first quarter. We expect it to have risen further in the first quarter of 2009 and to head up higher still over the coming quarters. This reflects our belief that consumers in general need to improve their balance sheets in the face of heightened debt levels, while many people are looking to retrench due to ongoing serious concerns about the economy and jobs.

The Bank of England is expected to report on Monday that mortgage approvals for house purchases rose to a 13-month high of 45,000 in May from 43,201 in April and a record low of 27,501 in November 2008. Even so, this would still be a very low level of mortgage approvals compared to long-term norms. Indeed, the Bank of England's data show that mortgage approvals averaged 95,000 a month between 1993 and 2008. In addition, the Bank of England is forecast to report that net mortgage lending was limited to £0.9 billion in May. This would be down from £973 million in April and below the average of £1.1 billion for the previous six months. It would also be down substantially from £3.3 billion in May 2008. This reflects the weakness of past mortgage approvals and it is current mortgage approval levels that are seen as the key forward-looking indicator for housing market activity.

Meanwhile, the Nationwide lender is forecast to report on Tuesday that house prices fell back 0.4% month-on-month in June after rising 1.2% in May. Nevertheless, this would cause the year-on-year fall in house prices to moderate to 10.6% in June from 11.3% in May and a peak of 17.6% in February. The overall evidence suggests that buyer interest is picking up markedly helped by the substantial fall in house prices from their 2007 peak levels and markedly reduced mortgage interest rates, but this is only gradually translating into increased house sales. Consequently, housing market activity is still very low by past norms and at a level consistent with falling house prices.

The Bank of England is expected to report on Monday that net consumer credit amounted to just £0.3 billion in May, as it did in April. Consumer credit is likely to be limited over the coming months by still very tight lending conditions, as well as many people looking to rein in their borrowing. Elevated and rising debt levels mean that there is a pressing need for many consumers to improve their balance sheets, while serious concerns over jobs, the economic outlook, and pensions will also lead to people trying to save more. Meanwhile, very tight credit conditions are making it hard for many people to borrow. Higher distressed borrowing is likely over the coming months (if people can get it), as an increased number of households struggle in the face of higher unemployment, as well as serious pressure on their finances.

The GfK/NOP consumer confidence index (out Tuesday) is expected to show that sentiment climbed to a 14-month high in June, as it is lifted by rising hopes that the economy has stopped contracting following the deep declines in the second half of 2008 and the first quarter of 2009, and could even have started to grow modestly. Specifically, we forecast the GfK/NOP consumer confidence index to climb to -26 in June from -27 in both May and 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 June manufacturing purchasing managers' index (PMI – out on Wednesday) is expected to show that the rate of contraction in the sector is continuing to moderate from the very deep levels seen in the latter months of 2008 and early 2009, helped by the major de-stocking that has now occurred and, to a lesser extent, the boost to competitiveness stemming from sterling's substantial overall depreciation. Specifically, we forecast the manufacturing PMI to have climbed to a 13-month high of 46.2 in June from 45.4 in May and 34.9 in February. Nevertheless, this would still indicate contraction, given that a reading of 50.0 denotes unchanged activity. Manufacturers are still battling against muted domestic demand, difficult conditions in overseas markets, intensified competition, and ongoing tight credit conditions. Furthermore, manufacturers will be hoping that sterling does not significantly extend its current rally.

Following the plunge in the sector's output in the first quarter, the construction sector purchasing managers index (PMI - out on Thursday) is forecast to show that the rate of contraction is slowing substantially. We expect the PMI to have edged up further to a 14-month high of 46.0 in June after jumping to 45.9 in May from 38.1 in April, and an all-time low of 27.8 in February (the series started in 1997). This would be getting relatively near to the 50.0 level that indicates unchanged activity. The construction sector is being helped by the government bringing forward some infrastructure spending as part of its efforts to boost the economy, while recent modestly but steadily increasing housing market activity - and increased optimism about the outlook - is starting to feed through to support house-building activity. Even so, with the housing market and commercial property sectors still under significant pressure, concerns remain about the outlook for the construction sector.

The service sector purchasing managers' index (out on Friday) is forecast to show that the sector again achieved modest expansion in June after unexpectedly returning to growth in May. We suspect that the business activity index may have fallen back to a limited extent after May's particularly marked improvement. Specifically, we expect the business activity index to have retreated to 51.0 in June after jumping to 51.7 in May from 48.7 in April and a record low of 40.1 last November. May was the first time since April 2008 that the business activity index had been above the critical 50.0 level that indicates unchanged activity. The Bank of England's regional agents reported in their June survey that "there was further evidence that the pace of contraction in demand for consumer services had eased," while gradually improving housing market activity and a pick up in business activity is also helping the services sector.

Bank of England data on Friday are expected to reveal that housing market equity withdrawal amounted to -£8.0 billion in the first quarter of 2009. This would mark a fourth successive net injection of housing equity following £8.0 billion in the fourth quarter of 2008, £5.9 billion in the third quarter, and £1.8 billion in the second. These are the first net housing equity injections since the second quarter of 1998. Sustained lower house prices have made housing equity withdrawal increasingly unattractive, while very tight credit conditions have made it more difficult to carry out the process, as well as to take out new mortgages. In addition, extremely low savings rates have made it markedly more attractive for many people to use any spare funds that they have to reduce their mortgages.

By Howard Archer