UK economic growth has remained in the region of 0.6 per cent during the past three quarters, a level consistent with the UK long-term growth rate of 2.5 per cent per annum.
The most recent Confederation of British Industry (CBI) survey provides no evidence of the significant upturn in investment and net exports predicted by the Bank of England in its May Quarterly Inflation Report. The manufacturing outlook has improved but the CBI survey reports that the level of export orders in June is similar to May’s number. While the CBI anticipates that export business will grow in the second half of 2006, its overall UK economic forecast is 2.4 per cent this year and 2.5 per cent next year. This is almost identical to the Bristol & West forecast of 2.5 per cent growth in 2006 and 2007.
While UK retail sales in May 2006 were exceptionally strong at 4 per cent per annum, this reflected one-off factors, such as electrical goods sales ahead of the World Cup and the unusually wet weather in May, which boosted clothing sales. In our view, UK growth is likely to remain in the region of 2.5 per cent per annum given the relative stability of UK monetary and fiscal policy.
Near term Base Rates
Currently money markets discount a 0.25 per cent Base Rate increase in September, followed by a further 0.25 per cent increase next February. We do not share the financial market’s view on Base Rate, which partly reflects the Bank of England’s recent Quarterly Inflation forecast.
The Quarterly Report was upbeat on UK growth prospects, which, to date, have not been justified by industrial survey data. We accept that underlying inflation has risen above target to 2.2 per cent. This partly reflects the sharp rise in oil and commodity prices, which has been partially reversed in the past month. Brent oil peaked in May at over $75 per barrel. In the past two weeks, the trading range has fallen to $65-$70 per barrel. Copper prices, which peaked at $8,500 per ton, have since fallen to $7,000 per ton.
No significant labour market pressures
Unemployment is on a gradually rising trend at 5.3 per cent and underlying average earnings remain at 3.8 per cent; well below the level of 4.5 per cent that the UK central bank perceives as an inflationary threat.
However, the Bank of England does not ignore money market sentiment. We therefore predict that there is a 40 per cent probability of a 0.25 per cent Base Rate rise this year. The most likely date for a 2006 increase would be 7 September, the first Monetary Policy Committee (MPC) meeting following publication of the August Quarterly Inflation Report. In our view there is a 60 per cent probability of a Base Rate increase in 2007, with the most probable date being early February.
Net mortgage lending
In 2006 to date, mortgage lending has marginally exceeded our optimistic forecast. In the first four months, gross mortgage lending volumes were £110bn while net mortgage lending totalled £34bn (both figures are seasonally adjusted).
The Royal Institute of Surveyors (RICS) May survey stated that the number of buyer enquiries has risen at the fastest rate since last October. The increase in longer-term period rates has not significantly dampened mortgage demand. It has led to greater demand for variable rate discount mortgage products. While we expect to see a modest slowdown in mortgage lending during the third quarter of the year, due to seasonal factors, the strength of the housing market to date has led us to marginally upgrade our net lending forecast for 2006 to £105bn. Gross mortgage lending is now forecast to be in the region of £320bn.
House prices
The Halifax price index for May showed an exceptionally high 9.1 per cent annual rise. The broadly comparable Nationwide figure was 4.8 per cent. Taking account of other measures of house price inflation, including the Land Registry and the Department of Communities and Local Government (DCLG), formerly the Office of the Deputy Prime Minister (ODPM), the weighted average house price increase is in the region of 6 per cent per annum, in line with Bristol & West’s forecast for 2006 as a whole.
The latest RICS survey shows the strongest monthly rise in house prices over the past year, with the highest increases in London and Scotland. The high level of house price inflation represents the continuing shortage of supply over demand. Supply shortages, especially in the South East area, continue to represent by far the largest factor behind the current rally in house prices.
