Eco Analysis - Mixed UK data but Q2 still looks strong (B. Hilliard)

Eco Analysis - Mixed UK data but Q2 still looks strong (B. Hilliard)

The UK data released today show the housing market revving up in response to the government's Help to Buy scheme. UK manufacturing output surprised with a sharp fall but Q2 GDP still looks on track for a strong gain of around 0.5% qoq.

■ UK housing sales expectations at a record high

The RICS housing survey showed strong increases in most indices. Most striking was the jump in sales expectations to a series high of 44.9 (the series started in October 1998 so is not that long) from 36.3. Price expectations rose from 20.7 to 23.0, but that is still well below previous peaks. New buyer enquiries were up from 30.3 to 37.6 - this is a good leading indicator of mortgage approvals three months ahead. It is absolutely obvious that the market is responding to the government's Help to Buy scheme, even though the major part of that does not come into operation until January 2014 (indeed, the design of the scheme has not yet even been finalised), belatedly to the Funding for Lending Scheme, and to a general improvement in consumer confidence.

■ UK manufacturing output plunges by 0.8% mom

This was totally unexpected - we and the market were looking for an increase of about ½% in May. Note that industrial production was flat on the month, far better than manufacturing, because of a jump in oil & gas extraction of 4.9% mom and of 3.6% mom in water services. The better IP number will limit the damage to GDP. Nevertheless, this should lead forecasters to reduce their forecasts of Q2 GDP growth by 0.1pp. It still looks likely to be strong but, prior to this release, the BoE's forecast of 0.5% qoq had looked a bit cautious. Now it looks more reasonable.

However, we are sceptical that these data truly reflect the state of the manufacturing sector. Both the PMI and CBI surveys indicated strongly positive output growth in May and we look for a bounce in June.

■ UK retail sales hold up well

The BRC retail survey showed total nominal sales growth falling slightly from 3.4% yoy to 2.9% yoy. This is still consistent with a reasonably firm sales trend. We had expected this after an exceptionally strong May (real sales were up by 2.1% mom). There is some evidence of the summer sales being held in June (as last year) rather than the more usual July. This is important for the June CPI numbers because, unless the discounting matches that seen in June last year, overall CPI inflation will suffer a temporary blip.

Brian HILLIARD