Economic & Market Review for the month of June

Economy

More Bank of England members support extra stimulus

Four members of the Bank of England's policy-setting Monetary Policy Committee supported pumping extra money into the economy at its latest meeting. That is one short of the majority which would be needed to increase quantitative easing (QE) from £325bn. All nine MPC members agreed with the decision to hold interest rates at 0.5%. The minutes said that the risks to the UK economy had increased since their last meeting, particularly from the euro area. "The likelihood of a disorderly outcome looked to have increased, and that could, if it crystallised, have a significant effect on global demand and the stability of the banking system, including in the United Kingdom," the minutes said. (BBC 20/6)

UK economy shrank more than thought

The UK economy shrank by 0.4% in the final three months of 2011, compared with previous estimates of a fall of 0.3%, official figures show. The estimate for the first quarter of this year was unchanged, showing the economy shrank by 0.3% in that period. Construction activity fell by 4.9%, its sharpest fall since the first quarter of 2009. The figures showed that household spending was constrained, with expenditure falling 0.1% compared with a previous estimate of 0.1% growth. That was driven by lower spending on financial services, which was offset to some extent by an increase in spending on food and drink and leisure. (BBC 28/6)

UK inflation rate drops to 3% in April, says ONS

The UK rate of inflation fell last month to a two-and-a-half year low owing to slowing fuel and food prices. The Consumer Prices Index (CPI) measure fell to 2.8% in May from 3% in April, the Office for National Statistics (ONS) said. The Retail Prices Index (RPI) measure fell to 3.1% from 3.5% in April. Inflation has fallen from 5.2% last September due to the waning impact of the VAT rise in 2011 and falling energy, food and commodity prices. The fall in inflation was unexpected, as the consensus among economists was that the rate would be unchanged in May. (BBC 19/6)

UK unemployment falls by 51,000

Unemployment in the UK fell by 51,000 to 2.61 million in the three months to April, official figures have shown. The jobless rate fell to 8.2%, the ONS said. But the claimant count - the number of people claiming Jobseeker's Allowance - increased by 8,100 in May compared with April, to 1.60 million. The ONS said the unemployment level in the UK overall was "showing some improvement". (BBC 20/6)

UK retail sales rise 1.4% in May

UK retail sales volumes rose 1.4% in May from April, slightly ahead of analysts' forecasts. Sales had slumped 2.3% in April, thanks to the wet weather and consumers panic-buying petrol in March. The ONS said sales of clothes and shoes had boosted volumes in May. On a year-on-year basis sales volumes were up 2.4% in May (21/6)

UK manufacturing output in surprise April fall

There was a surprise fall in UK manufacturing output in April, official data has shown, raising fresh fears about the wider economy. Factory output fell 0.7% in April from the month before, said the Office for National Statistics (ONS). It follows a 0.9% rise in March. The figure was worse than expected as analysts had predicted no change. The Ernst & Young Item Club economic forecasting group said it was a "serious cause for concern“. "The figures suggest that the manufacturing sector will be a drag on growth in the second quarter, which is already expected to be disappointing due to the extra bank holiday in June.”The outlook is also dominated by downside risks. UK manufacturers are at the mercy of the ongoing eurozone crisis and are highly vulnerable to a further slowdown in exports.“ (BBC 12/6)

UK construction sector activity sees sharp drop

Activity in the UK construction sector fell at the fastest pace for two and a half years last month. The Markit/CIPS purchasing managers' index (PMI) of activity in the sector fell to 48.2 in June, from 54.4 in May. A figure below 50 suggests contraction. It also found employment in the sector fell for the first time in four months. Construction sector weakness was cited as a key reason why the UK fell back into recession at the start of 2012. Figures from the Office for National Statistics showed that output in the construction industry fell by 4.8% in the first three months of the year, with the economy as a whole contracting by 0.3% in the quarter. (BBC 3/7)

The main Consumer Confidence Index fell by three points in May to 41 and is just four points above its lowest ever level of 37 in October 2011. The main Index is more than 34 points below its long run average and it sits at its lowest level so far this year The Index sits 16 points lower than this time last year

Robert Gardner, Nationwide’s Chief Economist, said: “Consumer confidence deteriorated further in May, leaving the main index languishing well below its long-run average, and highlighting ongoing caution among UK consumers.

“It is not surprising that confidence remains fragile, given that the UK economy slipped back into recession in the first three months of the year, with few signs of improvement in Q2. There was some positive news for households in recent months, with labour market conditions appearing to stabilise and inflation dropping, easing the squeeze on household budgets, though this was clearly not enough to lift spirits.” (Nationwide)

Mortgage and housing market

Mortgage approvals down slightly in May

Seasonally adjusted house purchase approvals dipped slightly in May to 51,100 cases, from a revised 51,600 in April. Remortgage activity fell slightly to 29,200 cases. Gross advances were £12.5bn, up from £9.8bn in April (Nationwide summary of BOE lending stats)

Commenting on the figures, Robert Gardner, Nationwide's Chief Economist, said: “House prices declined by 0.6% in June, taking the annual pace of house price growth down to -1.5%, the lowest reading since August 2009. The slightly weaker trend we’ve observed since March is unsurprising, given the difficult economic backdrop, with the UK economy dipping back into recession at the start of the year and few signs of a near-term rebound. Part of the weakness in house prices may also relate to the ending of the stamp duty holiday in March, which provided a temporary boost in early 2012, as buyers brought forward purchases that would otherwise have taken place later in the year.

The outlook for house prices remains highly uncertain. Economic conditions are expected to remain challenging over the next twelve months. However, policymakers’ efforts to bolster the supply of credit to the economy and to help lower the cost should provide support to demand. Moreover, the supply side of the market is still constrained, with construction failing to keep pace with the number of new households being formed.

Overall, this suggests a continuation of the pattern experienced over the past two years, with prices remaining fairly stable over the next twelve months.

Private rents rise again

The average rent being paid by private tenants in England and Wales rose again in May, to £712 a month. The 0.4% rise was the second monthly increase in a row, with average rents now back to where they were in January. It means rents are now 2.3% higher than a year ago. The figures, compiled by letting agency business LSL Property Services, show rents rising fastest in London and the South East. David Newnes of LSL said: "Rents have returned to the level seen before the impact of the stamp duty deadline rush by first-time buyers.” Historically high rents and rock-bottom savings rates are hampering attempts to save for the larger deposits banks now require. "In turn, fewer tenants are able to leave the sector, and the strong tenant competition is pushing up rents as a result, making saving for a deposit harder still.“ (BBC 22/6)

Three million young people still living with parents

The number of 20 to 34-year-olds in the UK still living with their parents is up to almost three million, according to the Office for National Statistics. It says 1.8 million men and 1.1 million women are still at home with mum and dad. That's a 20% rise since 1997. (BBC 30/5)

CML Market commentary

Despite the various headwinds facing the UK economy – and not least the ongoing pressure on household incomes - the housing market has performed reasonably strongly since late last year. Seasonally adjusted property transactions have been above year-earlier levels since November.

The pattern of housing transactions has been distorted by the ending of the stamp duty concession in late March. Property sales fell back by more than a quarter in April, following a surge in March. According to our Regulated Mortgage Survey, the drop off in activity was much greater for first-time buyers - barely half the level of March.

The see-saw pattern of lending appears to have continued in May, with our forward estimate being that gross lending totalled £12.2 billion, reflecting stronger house purchase and remortgage activity.

Mortgage approvals in April were a little higher than March on a seasonally adjusted basis. This is consistent with our view that activity levels are broadly flat.

Unfortunately, a number of one-off factors, such as the dreadful weather, the Diamond Jubilee weekend and the London Olympics, are set to distort a range of market indicators over the coming months, and it may be the autumn before we can more accurately gauge market trends.

The government has responded to ongoing eurozone concerns by heralding a “funding for lending“ initiative that is likely to feature housing. Details are expected shortly.

Meanwhile, the Bank of England has signalled that it will provide UK banks with unlimited liquidity if a full-blown eurozone crisis hits. (CML 21/6)