The latest survey of the property market from HBOS shows prices continuing to rise but at a more moderate pace. As a result, the rate of house price inflation in the three months to November has slowed to just 14.1 per cent. This is the most modest year-on-year gain recorded in almost two years. The picture portrayed by HBOS is not dissimilar to that signalled by the Nationwide Building Society last week.
We expect the softer trend in house price inflation to be extended into 2004. Our target is for an increase of between five and seven per cent in aggregate over the next twelve months. Crucially, the combination of healthy employment gains (still around the one per cent mark on a year-on-year basis) and relatively ‘cheap money’ should still provide support for the market.
The increasing share of disposable income taken up by mortgage repayments (in the three months to October, they were fourteen per cent higher than in the same period of 2002) is indicative of the increasing pressure on household cash flow. This is likely to act as a restraint on the performance of the housing market even if economic growth surprises on the upside in 2004.
The November CIPS survey of the service sector, which excludes retail and government sectors, showed business activity at its best level since June 1997. Incoming new orders were particularly strong but there were also improvements in most other components of the series including the level of outstanding business, employment and business expectations.
The report also provided some evidence that companies in this part of the economy are having a little more success in lifting their prices. The ‘average prices charged’ component clambered back to its best level since the beginning of this year. At a sectoral level, businesses based in the Financial Intermediation area saw the sharpest rise in activity over the month.
The CBI Distributive Trades survey suggests that retail sales slipped back in November following a very strong reading in October. Although the expectations component proved more resilient, it is noteworthy that ‘sales for the time of the year’ were generally felt to be disappointing. The indications looking forward are that retailers are not expecting a bumper Christmas.
The latest reported figures from the CBI are consistent with a slightly more modest rate of growth in volumes in the official series. We expect the year-on-year rate of gain to slow from 3.7 per cent at present to somewhere between 3 and 3.5 per cent over the coming months.
The survey also includes, on this occasion, a number of questions that are only asked on a quarterly basis. They suggest that the speculation, raised in a report from the British Retail Consortium, of a pick up in pricing power on the high street is misplaced and that retailers are actually cutting back on jobs. The negative reading on employment was the largest since 1995.
The reports released this morning provide a mixed picture as to the current state of the UK economy. Significantly, however, the combination of a moderation in the rate of house price inflation allied to the weaker tone to high street spending is likely to encourage the MPC to sit on its hands at this week’s meeting. Indeed, if these trends are sustained the authorities may be inclined to hold base rates steady at 3.75 per cent for rather longer than is generally expected.
