Inflation
Data out on Tuesday are expected to show annual consumer price inflation stable at 3.5% in February, which is the highest level since November 2008. Consumer price inflation spiked up to 3.5% in January from a five-year low of 1.1% in September 2009. This was primarily due to value-added tax (VAT) developments, sterling's earlier pronounced depreciation working through, and unfavourable base effects resulting from the sharp fall in oil prices in the latter months of 2008 and start of 2009.
Further upward pressure on inflation in February is likely to come from more retailers passing on January's increase in VAT from 15.0% to 17.5%. HThis may be countered by prices increasing less this year than a year ago as the post-Christmas clearance sales end. There appears to have been less discounting in the post-Christmas clearance sales in 2010 compared to 2009 when retailers were particularly worried about consumers' willingness to spend amid plunging economic activity and high stock levels.
Core consumer price inflation is also seen stable in February, at 3.1%. It previously rose to this level in January from 2.8% in December and 1.7% in September. In addition, annual underlying retail price inflation is expected to have remained at 4.6% in February, having climbed to this level in January from 1.3% in September. Finally, the year-on-year increase in retail prices is seen rising to 4.0% in February from 3.7% in January. This is due to unfavourable base effects resulting from the fall in mortgage interest rates in February 2009 as the Bank of England slashed interest rates in response to the deep recession.
Consumer price inflation is likely to peak around the current level of 3.5% and will hopefully start to fall back appreciably around midyear. Indeed, we believe it could well be back under the Bank of England's target level of 2.0% by the end of the year. Given that oil prices bottomed out early in 2009 and then firmed, base effects should become more favourable. Meanwhile, underlying price pressures should be contained by substantial excess capacity, muted recovery, wage moderation, and the need for retailers to price competitively in the face of still limited consumer spending.
Mortgage Approvals in February
The British Bankers' Association (BBA) is expected to report on Tuesday that mortgage approvals for house purchases edged down further to a nine-month low of 35,000 in February, after dropping sharply to 35,083 in January from a 27-month high of 45,650 in December. This would take it further below the average monthly level of 60,194 seen since 1997. The Bank of England's Trends in Lending Report for March reported that "mortgage approvals for house purchases fell sharply in January. Lending Panel data indicate that mortgage approvals for house purchases made by the major U.K. lenders fell slightly further in February."
A further drop in mortgage approvals in February—or even only a modest pick up after January's sharp decline—would raise suspicion that the downturn in housing market activity at the start of 2010 is more than just the consequence of the arctic weather and some house purchases being brought forward to late-2009 to beat the price threshold for stamp duty on house purchases moving back down from £175,000 to £125,000 at the start of January.
It would also reinforce our suspicion that house prices will be erratic and prone to corrections in 2010, and will probably be no better than flat over the year. Indeed, we would not be surprised if house prices recorded an overall modest drop in 2010. We believe that the overall appreciable house price rises that have been seen since early-2009 have been out of kilter with the overall economic fundamentals. This is even allowing for the support to the housing market coming from reduced mortgage interest rates and more affordable prices due to the pretty substantial fall in house prices from their October 2007 peak through to their early-2009 trough. Significantly, house prices have been lifted markedly since early-2009 by the shortage of properties for sale, but the March survey from Rightmove and the February survey by the Royal Institute of Chartered Surveyors both suggest that more properties are now coming on to the market so this prop is beginning to crumble. If more houses come on to the market and buyer activity is muted, then the demand-supply balance will move significantly away from vendors and weaken their pricing power.
Although the Bank of England may well hold off from raising interest rates until 2011, the overall economic environment (notably high unemployment and low earnings growth) is still far from supportive for house prices, while credit conditions remain pretty tight and the stamp duty threshold has fallen. In addition, house price/earnings ratios have moved back up. Indeed, Halifax data show that the ratio of house prices to earnings rose to 4.86% in January from 4.69% in December, and a low of 4.32% in March 2009, taking it clearly above the 1983-2009 average of 4.01%. The ratio edged back to 4.84% in February.
Retail Sales in February and CBI Distributive Trades Survey for March
Retail sales volumes (out on Thursday) are forecast to have rebounded by 1.3% month-on-month in February, after slumping 1.8% in January when footfall was hit hard by the arctic weather conditions. As a result, the year-on-year growth in retail sales volumes is seen improving to 3.7% in February from just 0.9% in January. Survey evidence from the Confederation of British Industry (CBI) and, to a lesser extent, the British Retail Consortium has indicated a decent rebound in retail sales volumes in February.The CBI's distributive trades survey for March (out on Wednesday) is forecast to show that the balance of retailers reporting that sales were up year-on-year has fallen back to +15% in March after spiking up to a 33-month high of +23% in February from -8% in January. This would be marginally above the +13% level seen in both December and November.
Despite the anticipated rebound in retail sales in February, we continue to suspect that the upside for consumer spending—and hence overall economic growth—will be limited in 2010 as households still face very challenging conditions, notably including high unemployment, low earnings growth, high debt levels, and January's VAT hike. Meanwhile, still serious concerns about the economic outlook and jobs are likely to maintain consumers' desire to improve their personal finances. Consumers will also be wary that further out they are very likely to face higher taxes as part of the major corrective action that will be needed to rein in the government finances. It has been mooted, for example, that VAT could rise to 20%. At least though, the Bank of England seems unlikely to raise interest rates any time soon, so low mortgage rates should continue to support consumers' purchasing power.
Business Investment in Fourth-quarter 2009
The Office for National Statistics is likely to confirm on Friday that business investment plunged 5.8% quarter-on-quarter and 24.1% year-on-year in the fourth quarter of 2009. The contraction in business investment had previously slowed to 1.8% quarter-on-quarter in the third quarter from 9.9% quarter-on-quarter in the second quarter and 8.9% quarter-on-quarter in the first quarter. The breakdown of the data as it currently stands shows that the decline in business investment was widespread across sectors in the fourth quarter, including quarter-on-quarter falls of 8.2% in manufacturing, 8.3% in the services sector, and 24.5% in construction. Only "other production" saw an increase— 7.8% quarter-on-quarter—which includes utilities and mining and quarrying companies.
The worst of the contraction in business investment should now be over, but it is likely to remain limited for some time to come given substantial excess capacity, still limited demand, and ongoing significant concerns and uncertainties over the strength and sustainability of the recovery. Furthermore, although low interest rates and better functioning markets are helping many companies to raise finance, a lack of credit availability remains a serious problem for a significant number of companies. This is particularly true for smaller companies, and it is still having a dampening impact on their business investment plans.
Recent surveys of investment intentions remain muted, despite clear improvement from their early-2009 lows. For example, the Bank of England's regional agents revealed in their March survey that "investment intentions remained subdued, as the significant margin of spare capacity, uncertainty about future demand and the restricted availability of credit continued to weigh down on contacts' spending plans." Nevertheless, the agents considered that "investment intentions did pick up a little" with spending plans "mostly targeted at improving efficiency rather than increasing capacity."
By Howard Archer
23 Mar - Consumer Price Inflation, February (Month-on-Month): +0.9%23 Mar - Consumer Price Inflation, February (Year-on-Year): +3.5%
23 Mar - Core Consumer Price Inflation (ex Food, Drink, Tobacco), February (Year-on-Year): +3.1%
23 Mar - Retail Price Inflation, February (Month-on-Month): +0.9%
23 Mar - Retail Price Inflation, February (Year-on-Year): +4.0%
23 Mar - Underlying Retail Price Inflation, February (Month-on-Month): +0.9%
23 Mar - Underlying Retail Price Inflation, February (Year-on-Year): +4.6%
23 Mar - BBA Loans for House Purchases, February (000s): 35.0
24 Mar - CBI Distributive Trades Reported Volume of Sales, March: +15%
25 Mar - Retail Sales, February (month-on-month): +1.3%
25 Mar - Retail Sales, February (month-on-month): +3.7%
26 Mar - Business Investment, Fourth Quarter 2009 (Quarter-on-Quarter): -5.8%
26 Mar - Business Investment, Fourth Quarter 2009 (Year-on-Year): -24.1%