Most commentators now seem to agree that we have already seen the steepest declines in economic activity, both globally and in the UK. As de-stocking comes to an end over the coming months, we are likely to experience at least some recovery in economic activity.
But with a range of factors acting to both stimulate and suppress any recovery, the future path for the economy is far from certain. We share the Bank of England’s analysis, outlined in its recent Inflation Report, that the most likely outcome is for the UK economy to experience a relatively weak and drawn-out recovery.
For the time being this means that the MPC perceives the risks of stimulating demand too little as greater than the risks of stimulating it too much. This view underpinned its decision earlier this month to expand the scope of its quantitative easing by an additional £50 billion over the next three months. When completed, the Bank will have created £125 billion of the £150 billion currently authorised by the Chancellor.
While the Bank remains watchful of inflationary pressures, the sharp fall in the Consumer Price Index (CPI) from 2.9% to 2.3% in April, and the short-term prospect of further falls, suggests that official rates will remain at current levels for quite some time.
Meanwhile, Standard & Poor’s recent threat to downgrade the UK’s debt rating serves as a powerful reminder that the post-election Chancellor of the Exchequer has some unfinished and difficult fiscal business to address. The effectiveness of future fiscal action is likely to have an important bearing on interest rate trends through next year and beyond.
But much more immediately, an inevitable consequence of slow economic growth, here and elsewhere, will be further deterioration in labour markets. The number out of work rose to 2.2 million at the end of the first quarter, 7.1% of the working population and the highest rate since mid 1997. Retiring member of the Monetary Policy Committee, David Blanchflower, predicts that the UK will continue to experience heavy job losses for the rest of this year and that at least one million more people will lose their jobs before unemployment peaks in the UK.
Clearly what happens in the jobs market will influence people’s sense of confidence and well-being, and be critical to future developments in the housing and mortgage markets.
There has been some evidence that consumer confidence has been improving recently, and this has gone hand-in-hand with signs of housing market sentiment and activity stabilising or improving modestly. The latest RICS survey has become progressively less negative in recent months, with enquiries by potential home buyers having increased for the sixth consecutive month. While the Halifax house price index showed a seasonally adjusted 1.7% decline in April, this was much sharper than the 0.4% drop reported by Nationwide. Looking at a number of measures over several months, it seems clear that values are still softening, but that the rate of fall has slowed noticeably from the sharp declines over the second half of last year.
Mortgage lending activity has been subdued in recent months. House purchase activity continues to run at disappointingly low levels. There were 101,000 house purchase approvals for the first quarter as a whole, this is down 42% on a year ago when activity had already started to fall off sharply. While seasonal factors have undoubtedly helped to lift house purchase applications and approvals over the past couple of months, the Bank of England suggests in its May Trends in Lending report that rising mortgage applications are at least consistent with recent rises in RICS new buyer enquiries.
Much of the recent mortgage lending weakness can also be attributed to low levels of remortgaging activity. Attractive reversion rates, associated with historically low interest rates, reduce the incentive to remortgage when borrowers reach the end of tie-in periods, while lower house prices mean that some borrowers will not meet lenders’ more conservative LTV criteria, and so will not be able to remortgage away.
The CML estimates gross mortgage lending dipping back down to £10.4 billion (not seasonally adjusted) in April. This suggests that the net lending figure to be reported by the Bank of England on 2 June will once again be negligible. This would continue the pattern seen in the first quarter of the year when net lending was just £84 million – by some distance the lowest on record.
With recent CML figures for the first quarter indicating that the buy-to-let sector was at least temporarily moribund, the immediate health of mortgage lending is tied closely to the fortunes of the owner-occupied part of the housing market. Recent weeks have seen hopeful signs of risk appetite returning and lenders developing innovative ways to help would be first-time buyers, but lenders continue to face significant funding challenges and any improvement is likely to be tentative for some while.
