Purchasing managers’ surveys and housing data head UK economic releases during week starting 30 November

Manufacturing purchasing managers’ survey for November

The manufacturing purchasing managers’ survey (out Tuesday) is likely to show some slowdown in activity in November after activity surprisingly spiked to a 16-month high in October. Specifically, we expect the manufacturing purchasing managers’ index to have retreated to 53.5 in November after jumping to 55.5 in October from 51.8 in both September and August and a 26-month low of 51.5 in June. October’s reading of 55.5 was the best since June 2014 and substantially above the third-quarter average of 51.9. It pointed to solid manufacturing expansion as it was well above the 50.0 level indicates flat activity.

Some slowdown in manufacturing activity looks likely in November given the extent of October’s surge reported by the purchasing managers and also the fact that the Confederation of British Industry (CBI) has already released a relatively soft industrial trends survey for November. Nevertheless, there were several features of the October purchasing managers’ survey that had positive implications for manufacturing activity in November. Encouragingly, the survey not only showed output growing at the fastest rate since mid-2014 in October, but new orders growth surged to the best level since August 2014. The purchasing managers reported that orders growth was led by improved domestic demand while export orders picked up a 14-month high (led by demand from the Middle East, East Asia and the United States). Furthermore, October’s pickup in output and new orders growth was reported to be broad-based across the consumer, capital goods and intermediate goods sector. The only proviso was that large manufacturers saw significantly more improvement in October than smaller companies. More good news saw employment in the manufacturing sector rise at the fastest rate since June 2014. Meanwhile, input prices fell sharply in October, reflecting low oil and raw material prices, as well as sterling’s strength. Manufacturers’ prices charged were cut for a second month running in October.

Latest hard data show that while manufacturing output contracted 0.3% quarter on quarter (q/q) in the third quarter, it did at least rise 0.8% month on month (m/m) in September after an increase of 0.4% in August as more companies picked up production after the summer holidays. Furthermore, 10 of the 13 manufacturing subsectors saw growth in September.

There do look to be some grounds for hope for manufacturers on the domestic demand front and manufacturers should at least be helped by very low oil and commodity prices, which increases their ability to price competitively. In particular, the outlook for consumer goods looks reasonable given improved purchasing power and relatively high confidence. Meanwhile, demand for capital goods will hopefully benefit from companies’ overall healthy cash positions, decent profitability, relatively favorable lending conditions and a still reasonable looking growth outlook. There may be a growing need for some companies to invest to add capacity over the coming months, while higher earnings growth may well also encourage increased investment aimed at saving labor. However, manufacturers will be concerned that increased uncertainty over the global economic outlook will result in companies becoming more cautious in their investment.

However, the export outlook for manufacturers currently still looks problematical. Sterling is still very strong against the euro in particular, while global growth currently remains muted and there is concern that it could be held back by weaker activity in emerging markets centered on a marked slowdown in China. Manufacturers will be hoping hard that Eurozone domestic demand can benefit over the coming months from reasonably decent fundamentals, notably including reasonable consumer purchasing power.

Construction purchasing managers’ survey for November

The purchasing managers’ survey for November (out on Wednesday) is expected to indicate that the construction sector is currently performing relatively well despite latest hard data from the Office for National Statistics reporting that construction output contracted 2.2% q/q in the third quarter thereby weighing down on GDP growth. Furthermore, construction output unexpectedly dipped by a further 0.2% month on month in September after a sharp fall of 3.4% in August. Indeed, September marked a third successive monthly fall in construction output with the result that it was down 1.6% year on year.

There continue to be considerable doubts about the accuracy of the construction data and survey evidence still points to activity expanding at a relatively healthy rate, even if it has come off its peak levels. Indeed, the purchasing managers indicated that overall construction activity was at a seven-month high in September and it then remained close to that level in October. Furthermore, the Bank of England’s regional agents reported in their November survey of business conditions that “Construction output had continued to rise solidly on a year earlier, although there were some reports of an easing in the pace of expansion of housebuilding and infrastructure activity.”

Specifically, we forecast the purchasing managers’ construction business activity index to have climbed to 59.0 in November after easing back to 58.8 in October from a seven-month high of 59.9 in September. This would be substantially above the 50.0 level that is supposed to indicate flat activity and also well above its lifetime (1997-2015) average reading of 54.7. However, this is clearly below the peak levels seen in 2014 (the index was above 64.0 in both January and September 2014). According to the purchasing managers, all construction sectors saw expansion in October, led by house building although this eased back from a 12-month high in September. Commercial activity actually picked up to an eight-month high. However, civil engineering growth eased back to a five-month low. Particularly encouraging developments in the October survey saw new orders growth pick up sharply to a 12-month high (with improved demand reported from both private and public sector clients) and employment growth climb to an 11-month high. Additionally, confidence among construction companies picked up to a five-month high.

Despite the third-quarter contraction in output, the prospects for construction seem largely decent and we expect it to see clear expansion in the fourth quarter, thereby contributing to GDP growth.

On the demand side, the conditions for housebuilding seem robust. Housing market activity has picked up and it should be supported by relatively decent fundamentals over the coming months, Furthermore, given the UK’s acute housing shortage, in the Autumn Statement, Chancellor George Osborne announced plans to double the housing budget to over GBP2 billion a year and to build 400,000 new affordable homes by the end of the decade. Additionally, the government has announced measures aimed at speeding up the planning system and reducing the obstacles to building new houses. However, there have been concerns about the construction sectors’ ability to build significantly more houses. In their July report, the purchasing managers cited “long lead-in times for new projects, scarce supplier capacity, skill shortages and stretched sub-contractor availability.

Outside of the housing sector, the prospects look largely decent for the construction sector. Economic growth is expected to be reasonably healthy over the coming months, which should be relatively supportive to commercial construction activity and civil engineering.

Service sector purchasing managers’ survey for December

We expect the purchasing managers' survey (out Thursday) to show further improvement in November after recovering modestly in October from a weakened September performance. Specifically, we expect the business activity index to have strengthened to 55.5 in November after rising to 54.9 in October from a 29-month low of 53.3 in September. It had relapsed to September’s low from 55.6 in August, 57.4 in July and 58.5 in June. A reading of 55.5 in November would be markedly above the 50.0 level that points to flat activity and also modestly back above its lifetime (1996-2015) average of 55.2.

There have been some indications that services activity has recently been hampered by increased caution among clients amid a somewhat uncertain global economic outlook. There were also reports in the September survey that the weakness in manufacturing activity was having some dampening impact on industrial-related services activity such as transportation.

Nevertheless, there is evidence that services activity is currently holding up pretty well, particularly for consumer services. Latest hard data show that services output expanded 0.7% q/q in the third quarter, which was actually up from growth of 0.6% quarter on quarter in the second quarter. Furthermore, most services sectors saw decent q/q growth in the third quarter, led by transport and communication (up 1.3%) and the business, services and finance sector (up 1.0%). Additionally, there was healthy growth in distribution, hotels and catering (up 0.8%). However, growth in government and other services activity was limited to 0.1% q/q as fiscal tightening measures likely impacted

Furthermore, the Bank of England’s regional agents indicated in their November report that both business and consumers services activity was generally healthy. Specifically, the agents reported that “Business services turnover growth had remained robust, particularly in professional and financial services. Growth in other business services had continued at a more modest rate”. The agents further reported that Annual growth in consumer spending had edged higher, with the pace of turnover growth remaining stronger for consumer services companies than for retailers.”

Finally, the CBI indicated that business volumes in the services sector continued to expand in the three months to November, but at a slower rate than in the three previous quarters. Consumer services’ growth was reported to have seen “steady and strong growth” but there was some loss of momentum in business and professional services. Optimism among services companies was reported to have improved over the past three months, and business volumes were expected to continue expanding at an above-average rate over the three months to February.

House prices in November and mortgage approvals in October

We expect the Bank of England to report on Monday that mortgage approvals for house purchases moved up to 69,800 in October after dipping to 68,874 in September from a 19-month high of 70,664 in August. While still just below August’s peak level, mortgage approvals at 69,800 in October would still be up by 17.8% from the 17-month low of 59,248 seen in November 2014. They would also be up 16.0% year-on-year. While housing market activity has clearly picked up appreciably overall during 2015, the slight easing back in mortgage approvals for house purchases from August’s peak levels could possibly reflect reduced expectations of a near-term rise in interest rates (this eases pressure on house buyers to act quickly to try and lock in low mortgage interest rates). It is also possible that housing market activity is being constrained by a shortage of properties on the market.

The Halifax lender is expected to report during the week that house prices rose by 0.6% m/m in November, which would cause annual house price inflation to stand at 9.6% in the three months to November. However, it should be borne in mind that the Halifax house price measure has been particularly volatile from month to month recently and a lot stronger overall than most other surveys. Specifically, recent data from the Halifax show house prices rose by 1.1% month on month in October after a drop of 0.9% in September, which was clearly largely a correction after prices had spiked 2.7% in August. Consequently, the year on year increase in house prices rose back up to 9.7% in the three months to October after dipping to 8.6% in the three months to

The Nationwide lender has already released its house price index for November, which unexpectedly showed prices rising just 0.1% m/m after increases of 0.5% in both October and September. Consequently, annual house price inflation on the Nationwide measure dipped to 3.7% in November after rising to a 5-month high of 3.9% in October from 3.8% in September and a 26-month low of 3.2% in August. The contrast between the Halifax and Nationwide data and the monthly volatility in the data highlight the importance of not pinning too much weight on one particular house price survey or measure, but to look at the overall picture.

Based on an overview of surveys, we expect house prices to rise by around 6–7% over 2016. The shortage of properties on the market poses a significant upside risks to this forecast.

We expect house prices to see solid increases over the coming months amid firm buyer interest (underpinned by largely supportive fundamentals) and a shortage of properties. However, it remains to be seen how the chancellor’s measures in the Autumn Statement affect the housing market. In the near term, it is very possible that the decision to impose a 3% surcharge on Stamp Duty on purchases of buy-to-let properties and second homes from April 2016 will lead to an increase in housing demand and exert upward pressure on prices as prospective buyers look to beat the increase. Further out, the move could modestly dilute housing market activity and upward pressure on prices. Meanwhile we doubt that the London Help to Buy scheme will have a major overall impact on the housing market.

We expect house buyer interest to be supported by largely helpful fundamentals, notably including overall increased earnings growth, high employment, elevated consumer confidence and still very low mortgage interest rates. A robust buy-to-let sector is currently also lifting housing market activity. Meanwhile, limited supply of houses is currently providing appreciable support to house prices. The latest RICS survey reported that new instructions fell for the 14th time in 15 months in October with the result that average stocks per surveyor fell to a survey low.

Nevertheless, the upside for house prices is expected to be constrained by more stretched house prices-to-earnings ratios, tighter checking of prospective mortgage borrowers by lenders, and the strong likelihood that interest rates will start rising gradually during 2016. According to the Halifax, the house price to earnings ratio reached a seven-and-a-half-year high of 5.35% in August and remained close to this at 5.31% in October. This is well above the long-term (1983–2015) average of 4.13. However, higher interest rates are unlikely to have a major dampening impact on the housing market as while they are likely to start rising in 2016, the Bank of England is stressing that the increases will be gradual and limited.

By Howard Archer