UK GDP growth should be confirmed at 0.8% quarter on quarter in the third quarter. The expenditure breakdown of GDP should show strong consumer spending, a much-needed pick-up in business investment, and robust residential investment. However, net trade was a significant drag on GDP growth in the third quarter. We expect mortgage approvals to have risen to a 69-month high in October and house prices to have increased strongly again in November. Consumer confidence may have stabilised in November, while the CBI distributive trades survey will indicate whether consumers are picking up their spending ahead of Christmas.
GDP growth in the third quarter
Wednesday sees the second estimate of GDP growth in the third quarter of 2013, which will also include a breakdown of the expenditure components for the first time.
We expect third-quarter GDP growth to be confirmed at 0.8% quarter on quarter (q/q) and 1.5% year on year. This was the strongest q/q growth since the second quarter of 2010, and was up from expansion of 0.7% q/q in the second quarter and 0.4% q/q in the first quarter. It also marked the first time that the economy has expanded for three successive quarters since the first three quarters of 2011.
We anticipate that the expenditure breakdown of GDP will show strong consumer spending, a much-needed pick-up in business investment, and robust residential investment. However, net trade was likely markedly negative, thus significantly dragging on GDP growth in the third quarter.
There is a small chance that GDP growth in the third quarter could be trimmed to 0.7% q/q from 0.8% q/q. Data released since the preliminary GDP estimate show that construction output actually grew by 1.7% q/q in the third quarter, rather than 2.5% q/q as had been estimated. This would mean that GDP growth in the third quarter would be shaved by 0.05 percentage point, given that construction output accounts for 6.3% of total output. However, industrial production growth in the third quarter was revised up to 0.6% q/q from the estimated 0.5% q/q expansion; this would add 0.015 percentage point to GDP growth, given that industrial production accounts for 15.2% of total output. Much will obviously depend on any revisions to services output, but there is little reason to anticipate a significant revision from the currently reported 0.7% q/q growth in the third quarter.
On the expenditure side of the economy, consumer spending likely saw strong expansion in the third quarter and contributed markedly to growth. Significantly, consumer spending accounts for some 63% of GDP on the expenditure side. Data already available show that retail sales volumes expanded 1.4% q/q in the third quarter, which was the strongest performance since the first quarter of 2008. Furthermore, car sales were buoyant in the third quarter and demand for consumer services seemingly improved (evident in the 1.3% q/q increase in the output of the distribution, hotels, and catering sector). Consumer spending was likely supported in the third quarter by elevated employment and improved confidence, although purchasing power was squeezed by higher inflation and muted earnings growth.
Survey evidence suggests that business investment likely expanded in the third quarter after falling markedly in the second quarter, supported by significantly improved business confidence. In addition, residential investment likely saw appreciable growth, as improving housing market activity encouraged increased activity. Consequently, we suspect that domestic demand could well have expanded by at least 1.0% q/q in the third quarter.
However, net trade looks likely to have been negative, significantly limiting GDP growth in the third quarter. Trade data for July–September showed markedly larger deficits overall. Exports were particularly disappointing, even though the Eurozone is now growing again (albeit very modestly).
GDP outlook
GDP growth will likely be strong again in the fourth quarter, but it may edge back to 0.7% quarter on quarter (q/q) from 0.8% q/q in the third quarter. As a result, we expect overall GDP growth to come in at 1.4% in 2013.
News on the UK economy has remained largely upbeat in recent weeks, although there are signs that consumers may have eased their spending in October after splashing out during the third quarter. Latest survey evidence from the purchasing managers indicates that services sector activity improved to a 16-year high in October, while construction activity rose to a 73-month high. Furthermore, the Confederation of British Industry indicated that manufacturing activity was robust in November after a slowdown in October. However, there are signs that consumers took a significant breather in October: retail sales volumes dipped 0.7% month on month, while year on year growth in private car sales slowed appreciably.
We expect GDP expansion to be largely centred in the 0.5–0.6% range through 2014. We forecast GDP growth to come in at 2.5% in 2014. Tight fiscal policy, only gradually easing credit conditions, and relatively limited global growth remain significant handicaps to UK growth prospects. Additionally, consumer purchasing power is currently constrained by very low earnings growth running well below inflation.
Nevertheless, growth prospects look relatively encouraging. Business investment should increasingly kick in to support growth, having been very much the weak link in the recent recovery. Indeed, business investment fell by 2.7% q/q in the second quarter, which was the fourth drop in five quarters. Encouragingly, business confidence has seen marked improvement, and there is evidence in recent surveys that businesses are now lifting their investment plans. Furthermore, generally healthy corporate cash positions are helpful for investment prospects. There are also some hopeful signs that very tight credit conditions are starting to ease gradually. While there is currently little need for companies to invest to add capacity in many sectors, investments are likely to increase to upgrade or replace dated capacity in order to boost efficiency and cut costs. We may also see investments in the development of new products and markets.
Meanwhile, much improved consumer confidence and rising employment should ensure that consumer spending holds up reasonably well. The squeeze on purchasing power should ease as earnings growth picks up slowly over the coming months and as consumer price inflation hovers close to 2.5% for a while (after falling to 2.2% in October from a peak of 2.9% in June). However, the upside for consumer spending is likely to be limited for some time to come, as earnings growth seems unlikely to rise above the inflation rate before mid-2014 and consumer debt levels remain high despite significant progress in deleveraging. Data from the Bank of England show that household debt was still 140% of household income at the end of 2012, although it has fallen from a peak of almost 170% in 2008.
A strengthening housing market should also be helpful to growth prospects, both through supporting consumer spending and underpinning a pick-up in residential investment.
Exports will hopefully be helped by gradually improving global growth over the coming months. Specifically, we forecast global growth to improve from 2.4% in 2013 to 3.3% in 2014, although the Eurozone is likely to see only slow improvement. The pound would ideally be at a more competitive level, but it is currently not at a very damaging level despite hitting an 11-month high on a trade-weighted basis in November. However, net trade is likely to struggle to make a positive contribution to growth as decent domestic demand will suck in imports.
CBI distributive trades survey for November
The Confederation of British Industry (CBI) distributive trades survey for October (out Wednesday) is expected to have shown some improvement in November. Specifically, we expect the CBI survey to show that the balance of retailers reporting that sales moved back up to +12% year on year in November, following a sharp retreat to +2% in October from a 15-month high of +34% in September. The balance had climbed to September’s high from +27% in August, +17% in July, +1% in June, and a 16-month low of -11% in May. Survey evidence for October from the British Retail Consortium was also muted, while hard data from the Office for National Statistics showed that retail sales volumes fell 0.7% month on month (m/m) in October. Previously, volumes rose 0.6% m/m in September and 1.4% quarter on quarter in the third quarter, which was the strongest quarterly performance since the first quarter of 2008.
A decent pick-up in the CBI survey would reinforce the belief that October’s marked relapse in retail sales was primarily due to consumers taking a breather before Christmas after spending at a robust rate over the summer. However, a weak CBI survey could fuel concerns that consumers are retrenching in the face of the extended squeeze on purchasing power caused by consumer price inflation running well above earnings growth. This would be a particular worry for retailers as the critical Christmas period builds up.
With purchasing power limited, many people have likely felt the need to rein in their spending temporarily, particularly if they want to build up their funds for spending over the Christmas period. While latest data show that consumer price inflation retreated to a 13-month low of 2.2% in October from 2.7% in September, it was still three times higher than average annual earnings growth of 0.7% in the three months to September. Furthermore, the recently announced energy price hikes will add to the serious squeeze on many consumers. It is also notable that consumer confidence edged back in October, although this small dip was from a near six-year high in September following strong gains over the five months to September.
On the positive side, markedly rising employment and a strengthening housing market should provide ongoing support to retail sales, while consumer confidence is still at a much stronger level than earlier this year. Earnings growth also seems likely to pick up over the coming months. However, this increase may be gradual, as companies remain keen to contain costs in a still competitive environment and still appreciable labour market slack limits workers’ ability to push for large pay increases. Meanwhile, consumer price inflation may well hover around 2.5% over the coming months. Consequently, earnings growth seems unlikely to move above inflation before mid-2014, although the gap between the two should gradually narrow over the coming months.
As the critical Christmas season builds up over the coming weeks, it will be interesting to see how confident retailers are about their sales prospects and what strategy they choose to adopt. Given the pressure on consumers’ purchasing power, retailers may feel a need to engage in major discounting and promotions to entice consumers to spend. Alternatively, retailers may feel less of a need to engage in these strategies this year given higher consumer confidence and the improved economic environment. It will also be interesting to see if consumers limit their Christmas spending early on in the hope of getting better deals nearer to the big day.
Consumer confidence in November
The GfK/NOP consumer confidence index (out overnight Wednesday/Thursday) is expected to have stabilised in November, still remaining markedly higher than earlier in the year. Specifically, we expect the index (which is carried out on behalf of the European Commission) to have remained at -11 in November after dipping to this level in October from -10 in September, which had been the highest level since November 2007. Previously, the consumer confidence index rose sharply to September’s peak level from -13 in August, -16 in July, -21 in June, -22 in May, and -27 in April. The index is now broadly in line with its lifetime (since 1974) average of -9. In contrast, the index averaged -29 in 2012 and stood substantially below its lifetime average from early 2008 through to early 2013.
We expect the upside for consumer confidence to have been limited in November, primarily owing to concerns over the ongoing squeeze on purchasing power coming from consumer price inflation running well above earnings growth. There may also have been a further modest easing in optimism over the economic outlook after it rose strongly through to September. While consumer price inflation retreated to a 13-month low of 2.2% in October from 2.7% in September, it is still running three times higher than the average annual earnings growth, which stood at 0.7% in the three months to September. Furthermore, the series of recently announced energy price hikes are likely of concern to many consumers.
On the positive side, some support to consumer confidence in November likely came from the improving labour market and the strengthening housing market.
Mortgage approvals in October and house prices in November
Latest housing market surveys and hard data are consistently showing significantly strengthening activity and buyer interest. We expect Bank of England data (out Thursday) to report that mortgage approvals rose significantly to a 69-month high of 69,000 in October from 66,735 in September, 63,396 in August, 58,786 in June, and a 2013 low of 52,139 in February. This would also mean that mortgage approvals would be up 31.5% year on year, from 52,476 in October 2012.
Despite rising for an eighth successive month to stand at 69,000 in October, mortgage approvals will still be below the long-term average. Mortgage approvals have averaged 84,633 a month since 1993. They had averaged as high as 119,034 a month during 2006 and 104,209 during 2007.
The Bank of England is also forecast to report that net mortgage lending increased to a 21-month high of GBP1.3 billion in October, up from GBP1.0 billion in September. This would be four times the October 2012 level of just GBP323 million. Nevertheless, mortgage lending is still very low compared to long-term averages, largely because it is being limited by high capital repayments. Specifically, it has averaged GBP3.8 billion a month since 1993.
Improving activity is underpinning marked firming in house prices. We forecast data to be released on Friday by the Nationwide lender to show that house prices rose by 0.7% month on month (m/m) and 6.3% year on year (y/y) in November. This would be the strongest annual increase since July 2010. Latest data from the Nationwide show that house prices rose by 1.0% m/m in October, 0.9% m/m in September, and 0.6% in August. The national increase in house prices is being lifted markedly by the gains in London; house prices in London were up 10.0% y/y in the third quarter.
Housing market activity is being boosted by substantially improved consumer confidence, elevated employment, and extended low mortgage interest rates, all on top of support from the Funding for Lending Scheme and the Help to Buy initiative. Additionally, the Bank of England’s initial indication that interest rates were unlikely to rise before 2016 may have given many people greater confidence in their ability to purchase a house. It remains to be seen if the Bank of England’s latest indication that interest rates could start rising early in 2015 rather than mid-2016 will have any impact on the housing market – we suspect not.
House prices look set to see further solid increases over the coming months. We suspect that house prices could rise by around 1.5% over the final couple of months of 2013 before increasing by 8% in 2014. While these projected house price rises are expected to be mainly driven by increases in London as well as parts of the South East, house prices are likely to strengthen appreciably in most regions and to make gains across the country.
While the impact of the strong house price rises in London on the national increase in house prices is a serious concern, we are some way off from the emergence of a housing market bubble. In fact, in many areas house prices are still well below their 2007 peak levels and rising only modestly at the moment. Data from the Nationwide show that house prices in the third quarter of 2013 were still below their 2007 peak levels in 11 out of the UK’s 13 regions: Northern Ireland (52.3%), the North (13.1%), North West (13.0%), Yorkshire and Humberside (12.0%), Wales (11.5%), Scotland (11.3%), West Midlands (8.5%), East Midlands (7.0%), South West (6.4%), East Anglia (4.6%), and Outer South East (3.8%). Apart from London (9.1%), prices were only above their 2007 peak levels in Outer Metropolitan (0.7%).
Nevertheless, there are signs that the strength in housing market activity and house prices is becoming more widespread. Furthermore, there is a significant risk that house prices could really take off across a widening range of regions over the coming months, especially if already improving housing market activity and rising buyer interest is further lifted by the Help to Buy mortgage guarantee scheme, which started in October.
A shortage of new properties for sale compared with demand could be an increasingly significant factor in pushing up prices, and not just in London. The October survey from the Royal Institution of Chartered Surveyors reported that “the pace of demand exceeded that of supply in every part of the country, pushing up prices. At the national level, the gap between demand and supply is now at its greatest since May 2009.”
An improving housing market is supportive to economic activity and growth prospects, while modest house price rises also have some benefits. These price increases are especially beneficial when they occur in areas where house prices are still substantially below their peak 2007 levels and a significant number of people are facing negative equity.
However, it is vitally important for economic stability and longer-term growth prospects that a new housing price bubble does not emerge. It is vitally important that policymakers closely monitor the situation and are prepared to act quickly and decisively if signs of a housing market bubble start to mount.
Consumer credit in October
The Bank of England is expected to report on Thursday that unsecured consumer credit was essentially stable around GBP900 million in October, which is a 2013 high. It climbed to GBP864 million in September from GBP680 million in August and a 2013-low of GBP396 million in June. This is up substantially from the average monthly level of GBP159 million in 2012. While net borrowing on credit cards slowed to GBP151 million in September (a five-month low), the net increase in other loans and advances picked up markedly to a 2013 high of GBP713 million.
Markedly improved overall consumer confidence seems to have caused people to become more prepared to borrow in recent months. The squeeze on consumer spending coming from inflation running well above earnings growth for an extended period may also mean that some people are having to borrow more to finance major spending.
Significantly, lenders are making more unsecured credit available to consumers. The October quarterly credit conditions survey from the Bank of England revealed that lenders reported an increase in the amount of unsecured credit made available to consumers in the third quarter, and that a further increase is expected in the fourth quarter. The improved economic environment is likely making banks more prepared to lend to consumers. It may also be evidence that the Funding for Lending Scheme is having a positive impact in this area.
There is some concern that improved UK growth is being fuelled by consumers increasing their debt. However, while unsecured consumer borrowing has undeniably picked up overall in recent months, it is currently still relatively limited compared with long-term norms. It is also appreciably below the levels seen before the 2008/09 crisis. Net unsecured consumer credit averaged GBP1.4 billion a month from 2000 to 2007, and it averaged GBP1.1 billion a month from 1993 to 2007. It is also worth noting that consumer debt levels have come down appreciably from the peak levels seen in 2008. The Bank of England’s quarterly Inflation Report in May showed that household debt had fallen to 140% of household income in the fourth quarter of 2012 from a peak of almost 170% in 2008.
By Howard Archer
27 Nov - GDP, third quarter 2013 (quarter on quarter): +0.8%
27 Nov - GDP, third quarter 2013 (year on year): +1.5%
27 Nov - CBI distributive trades reported volume of sales, November: +12%
28 Nov - GfK consumer confidence, November: -11
28 Nov - Bank of England consumer credit, October (GBP/billion): 0.9
28 Nov - Bank of England net lending secured on dwellings, October (GBP/billion): 1.3
28 Nov - Bank of England number of loan approvals for house purchase, October (thousands): 69.0
29 Nov - Nationwide house prices, November (month on month): +0.7%
29 Nov - Nationwide house prices, November (year on year): +6.3%