Latest Macro Developments Affecting The Market

Consumer Confidence Slips Backs to the New Normal

GfK’s (Growth from Knowledge) headline confidence measure dropped to -13 in June as opposed to the score of -9 last year, indicating British households grew more pessimistic this month. The survey revealed that in the face of Brexit uncertainty, Britons became gloomier about their personal financial situation, erasing a slight rebound in May. Renewed fears about a no-deal Brexit and the Tory leadership campaign has hit consumer confidence in the country. The survey showed that all five components of the index, including scores for major purchase intentions, general economic optimism and personal finances, dropped from the previous month. The results were also confirmed by reading from a European Commission survey, which showed worries of downbeat consumer spending.

The GfK index for big purchases, part of the broader consumer index, fell three points to -2 in June 2019, two points lower than in June 2018. Coupled with a decline in the Personal Financial Situation index, which decreased by four points this month to -1, could point to a turbulent time for the economy over the upcoming months. Together, this could be signalling a levelling off in employment and earnings growth in the second quarter, a major setback for a consumption induced economy.

A poor shopping season in the second quarter after two consecutive month-on-month contractions in April and May led to a drop in the sentiment in the retail sector to -7.5 in June, down from +3 in May and to its lowest level in six years. Though the industrial sector deteriorated marginally to -10.8, the services sector improved in June. The fears of a sharp slowdown in economic growth in the second quarter were further confirmed by the sentiment indicators, as many economists predict no growth, down from a decent expansion at the start of the year.

The Savings Index, which is not included in the Overall Index Score and proves to be an important leading indicator, was up for the third month in a row at +19. However, as households must either use their savings or go into debt to fund their cost of day-to-day living, the official savings ratio (the share of disposable income being saved) is at near historic lows.

Amid a change in the Prime Minister potentially bringing more turmoil, the findings indicate that the economy could see a rocky time ahead, especially as both Boris Johnson and Jeremy Hunt saying that they are open to a no-deal Brexit.

UK House Prices Falls in May

According to the data compiled by the Nationwide, after adjustment for seasonal factors, UK house prices cooled in May, reporting a contraction from positive monthly growth in April, while the number of transactions and mortgages approved remained stable. The survey revealed that as consumer confidence remained subdued, house prices fell by 0.2 per cent on a monthly basis in May and annual house price growth slowed to 0.6 per cent, with May being the sixth month in a row when yearly house price growth remained below 1 per cent. The data suggested that new buyer inquiries remained subdued in recent months, while the number of mortgages approved for house purchase and the number of property transactions remained broadly stable.

As compared to the last month, when the average price for a house was GBP 214,920, the seasonally unadjusted average price in May was GBP 214,946. Due to robust labour market conditions, with employment rising at a healthy rate, and earnings growth slowly gathering momentum, first time buyer numbers reached 359,000 in the twelve months to March, which was just 10 per cent below 2006 peaks and showcased their steady recovery. The building society said the ongoing support had been provided by low borrowing costs. As a result, in most parts of the country, the cost of servicing mortgage as a share of take home pay has remained near to or lower than long run averages, even though house prices remain high relative to average incomes, helped by record low policy rates.

The report added that the rise in the first-time buyers comes amid less of a cost advantage to wait to accrue a larger deposit as the market has seen a fall in the interest rates on mortgages with smaller deposits as compared with those with larger deposits. However, for most prospective first time buyers, raising a deposit appeared to be the main challenge. Moreover, the survey reported that in recent years, a growing share of first-time buyers had received help from friends and family or an inheritance to raise a deposit to buy a home, and an essential source of support for first time buyers to ease deposit constraints has been “Help to Buy” equity loan scheme by the government.

Robert Gardner, the chief economist at Nationwide, said that uncertainty was likely to weigh on the market in the coming months and housing market trends are expected to continue to mirror developments in the broader economy. While healthy labour market conditions and low borrowing costs would provide underlying support, Brexit uncertainty will likely to have instilled some caution in buyers. Moreover, challenging conditions is being reinforced by political and economic uncertainties, which is expected to impact the overall market conditions as the buyer remain warry. Nevertheless, there are overall signs that the housing market has picked up slightly from the lows at the start of the year and recent data suggest that housing market activity may well have got at least some temporary support from the avoidance of a disruptive Brexit at the end of March.

Growth in GDP Expected to Slow in The Second Quarter

The Office for National Statistics confirmed on 28 June 2019 that UK Gross Domestic Product (GDP) grew by 0.5 per cent in January to March as compared to the last quarter of 2018. It accelerated by 1.8 per cent in the Q1 of 2019 when compared with the same quarter of the last year. Reflecting weaker than expected wages and salaries data, nominal GDP was revised down from the first estimate of 1.0 per cent to 0.9 per cent in Quarter 1 2019. Due to the growth of 1.9 per cent in manufacturing output, production contributed positively, while the services sector provided the most significant contribution to the increase in the output. Though net trade contributed negatively, government consumption and investment and Household expenditure in the first quarter contributed positively to the growth.

The GDP grew by 0.2 per cent month on month in the last quarter of 2018, indicating an acceleration in economic growth. While the business investment was still 1.5 per cent lower as compared to the first quarter of last year, it rose 0.4 per cent quarter-on-quarter after dropping in every quarter last year. In the GDP monthly estimate, the head of GDP Rob Kent-Smith said that uncertainty ahead of the original EU departure date had led to planned shutdowns, leading to a dramatic fall in car production, which resulted in shrinking of the economy in the month of April. Also, as the boost from the early completion of orders ahead of the planned exit faded, there was also widespread weakness across manufacturing in April.

According to data from the Office for National Statistics, GDP declined by 0.4 per cent in April from the previous month. This was worse than what economists had predicted, and the fall was the worst since March 2016. The output of motor vehicles producers declined by 24 per cent in April over the previous month, the largest decline since records began in 1995, as vehicle manufacturers decided to postpone their annual factory shutdowns from August to April to prepare for a no-deal Brexit and minimise their losses. After a strong performance in March, most of the manufacturing sectors contracted month on month in April. This also led to a shrinking deficit of goods trade and lower imports of goods, as the goods trade balance fell to GBP 12 billion in April, down from GBP 15 billion in March, and imports of goods shrank to GBP 40 billion in April, down by GBP 6 billion as compared with the previous month.

Although many experts reckon that there has been some rebound in car production as plants re-opened, it looked like the economy continued to struggle in May. While services expansion was still only limited despite a slight pick-up from April, the purchasing managers reported a contraction in construction (at a 14-month low) and manufacturing (at a 34-month low). The belief that the economy is headed for a weak performance in the second quarter is reinforced by a dip in GDP in April and apparent ongoing softness in May. Economic activity in the second quarter will be weighed down by a challenging global economic environment, am uncertain UK political situation and stretched Brexit process. Accordingly, many economists, including the Bank of England, anticipate the GDP to be flat in the second quarter.