Consumption stays firm in Q2 but slowdown is likely

Transcription

1 Economics Consumption stays firm in Q but slowdown is likely UK Property Market Chart Book September 16 Sponsored by:

2 Key Property Data Release Dates Frequency Body Period covering Release date M Markit Construction PMI Aug -Sep-16 M BIS Building Material and Components Aug 7-Sep-16 Q/M Halifax House Price Index Aug 7-Sep-16 M BoE Quoted Rates Aug 7-Sep-16 M RICS Residential Market Survey Aug 8-Sep-16 M/Q ONS Construction Output and New Orders July/Q 9-Sep-16 Q Housing Statistics for Scotland Q 13-Sep-16 M ONS Consumer Price Inflation Aug 13-Sep-16 Contents Economic comment... 3 Financial market indicators... 4 UK Economy...5 Global Economy...6 Construction sector...7 Housing market...8 Commercial property sector...9 Additional Resources...1 M ONS/Land Registry House Price Index July 13-Sep-16 Q BoE Mortgage Lenders and Administrators Statistics Q 13-Sep-16 M UK Labour Market Statistics Sep 14-Sep-16 M CML Monthly Lending Trends Aug 14-Sep-16 M IPD UK Commercial Property Index Aug 15-Sep-16 M BoE MPC announcement and minutes Sep 15-Sep-16 M HMRC Residential Transactions Aug 1-Sep-16 M BBA High Street Banking Aug 6-Sep-16 m Nationwide House Price Index Aug 8-Sep-16 M BoE Mortgage Lending Statistics Aug 9-Sep-16 Q ONS UK GDP Q 3-Sep-16 RICS Economics 16 September 16

3 Consumption rise in Q but surveys point to slowdown in job gains The second estimate of GDP showed an unrevised expansion of.6% in the second quarter with household consumption the driver of output once again; household spending rose by.9% over the quarter. Gross fixed capital expenditure increased by 1.4% following two consecutive quarters of decline while the net trade deficit reached an all time high of 15.6bn. Firm household spending growth suggests that the strong labour market performance offset much of the impact of uncertainty on consumption in the run up to the Brexit vote. July data on retail sales show continued growth in the immediate aftermath of the vote to leave. However, with the outlook for UK growth uncertain, there remains a significant chance that consumption growth will falter in the near future. Indeed, evidence from recent business surveys shows that firms expectations for employment growth have reduced following the vote and point to a less bouyant labour market, which will weigh on spending. In the backdrop of record employment levels, household spending was never likely to be the first casualty of the referendum decision; the more volatile business investment component is likely to suffer more, and sooner. While investment rose by.5% in Q, it is still below its average over the last year with uncertainty in the run-up to the vote causing a fall during the previous two quarters. Survey evidence points to a further contraction in investment and the most recent Treasury consensus forecasts point to a decline in gross fixed capital formation of 1.1% this year and.8% in 17 (from 5% growth last year). Business surveys suggest that activity in the euro area is holding up well in the wake of the UK s vote. While there is evidence of some caution in forward looking indicators in the manufacturing sector, the bloc s dominant services sector looks likely to keep growth steady over the coming quarters. In the US, Q GDP growth was revised down slightly to 1.1%, from 1.% previously, but recent jobs growth has been strong with non-farm payrolls rising by 55k in July. At the Kansas city Feds annual economic policy symposium in Jackson Hole, Wyoming, Janet Yellen, the Federal Reserve chairwoman emphasized strong jobs growth as evidence that the US economy was nearing the Fed s target of full employment and price stability. She suggested that another rate rise was on the cards in the near future. The Fed has three policy meetings left this year and, while a move in September is remains unlikely, her comments and supporting statements from other senior policymakers during the conference have boosted the chance of a rate rise before year end. Chart of the month Index Rural Land and Agricultural Commodity Prices *Index is a land use weighted average of cattle, sheep, milk and common UK grain prices Composite UK agricultural output price index (LHS) RICS/RAU Rural Land Price - opinion based (RHS) Source: RICS/RAU, Macrobond In the UK residential market, surveyors report that prices have broadly flatlined over the previous three months. However, expectations for growth in the coming year have recovered somewhat following the initial shock of the vote to leave the EU, with a net balance of 3% of contributors forecasting a rise in prices, up from % in June. HMRC data show that transactions remained broadly steady in July but mortgage approvals suggest that activity will slow in the coming months. A net balance of 7% of surveyors reported a decline in buyer demand in July, the fourth consecutive monthly fall, but the reduced supply pipeline will provide support to prices. Official construction data for Q show a broad-based contraction with only the private industrial and public non-housing segments seeing any rise in output. In the private housing segment, which has been the main driver of growth to date, output flatlined, but private housing starts continue to drift higher. However, RICS lead indicators point to a fall in the coming months with builders likely to delay project starts until there is greater clarity on the economic impact of the EU referendum decision. The RICS Rural Land Market Survey for H1 shows demand for farmland falling while expectations for price growth turned significantly more negative. Anecdotal evidence from surveyors pointed to low commodity prices and uncertainty over the future of CAP payments as the key factors holding back demand. While the government s recent committment to maintain CAP funding until may ease some of the downward pressure on prices, market fundamentals remain challenging with the price of the UK s main agricultural produce still down in annual terms (see chart of the month) despite a boost recently due to sterlings fall in the wake of the EU referendum. In the comemercial property market, capital values have begun to decline with CBRE s UK-wide index falling 3.3% in July. The number of investment transactions reached a multi-year low in Q, and the continued confusion over the UK s future economic growth and trading relationships will weigh on activity in the quarters to come. REIT prices have risen slightly following the initial shock of the vote to leave but remain 1%-15% down over the course of the year. 3 RICS Economics 16 September 16

4 Financial Market: Global equity markets drift sideways The major global equity indices have trended sideways over recent weeks and most are now higher than their pre-brexit level. Financial markets are pricing in a significant chance of some further small rate cut in the coming months = Jan 14 Global Equity Indices 6 UK Interest Rate Expectations Net balance, % % FTSE 1 S&P 5 Eurostoxx Shanghai Composite 8 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Source: Macrobond -. - ZEW UK short term interest rate expectations (LHS) UK Bank Rate change expectations - next 4 months (RHS)* Jan-1 Jul-1 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 *proxy based on forward overnight interest rates Source: Bank of England, ZEW UK inflation expectations have drifted higher in recent months on signs that some global disinflationary pressures may be easing. Sterling has remained broadly flat through most of the August but remains over 1% below its immediate pre-referendum level. 3.4 Oil Price and UK Inflation Expectations % $ per barrel 14 1 Index UK Trade Weighted Effective Exchange Rate Inflation expectations - 5 years (LHS) Brent Crude Oil Price (RHS) 4 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Source: BoE, Macrobond 7 Jan-1 Jul-1 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Source: Macrobond 4 RICS Economics 16 September 16

5 UK Economy: Consumption continues to drive growth The second estimate of GDP showed growth unchanged at.6% with housholds continuing to drive growth. Gross fixed capital formation (GFCF) contributed to the rise in Q but underlying trend growth has slowed..8 % Contributions to Growth by Expenditure Category UK retail sales held up strongly in the month following the referendum, rising by 1.4% in July and 5.9% compared to the previous year. This has been driven by continued strong labour market performance. 1 3 month annual % change Employment, Earnings and Retail Sales Volume Households Non-profit inst. Government GFCF Net trade Source: ONS - Employment times real earnings ONS Retail Trade Volume Source: ONS However, if the Brexit vote begins to take a toll on employment, as survey evidence suggests it might, consumption growth could soften. Net trade dragged heavily on growth again in Q but this drag should begin to ease due the sharp fall in the value of sterling recently. However, it will take some time for this to have any effect on headline output growth Employment Expectations and Durable Goods Expenditure Net balance, % JP Morgan UK effective exchange rate (Adv. years - LHS) UK trade balance (RHS) Sterling Exchange Rate and UK Trade Balance bn EC employment expectations* (LHS) UK employment (RHS) *Employment weighted average of EC sector surveys Source: European Commission, ONS Source: JP Morgan, ONS RICS Economics 16 September 16

6 Global Economy: Euro area survey data stays generally firm Most recent survey data suggests that euro area economic activity has held up relatively firmly in the immediate aftermath of the UK vote to leave the EU. Nevertheless, growth remains lacklustre. The euro bloc s dominant services sector is driving output growth in the area and survey evidence points to continued expansion over the rest of the year Index (>5 is growth) Markit Composite Index and Euro Area GDP (4 quarter sum) Balance, % Service Sector Confidence and Sector Output Growth (4 quarter sum) Markit Composite PMI (RHS) Euro Area GDP (LHS) EC services confidence indicator* (Adv. 6 months - LHS) Euro area services output (RHS) Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Source: Markit, Eurostat *Q3 16 reading is average of July and August survey results Source: European Commision, OECD Aside from the slump in oil prices, a significant decline in global food prices was a driver of worldwide disinflationary pressures but this also looks to be subsiding recently. Despite sluggish US GDP growth in recent quarters, the Fed has indicated an inclination to raise rates in the near future, citing strong employment gains. 6 Global Food Prices and CPI 7 3 's US GDP and Employment Growth % quarterly growth (annualised) FAO global food price index (Adv. 6 months - LHS) -3 IMF world CPI (LHS) Source: FAO, IMF 5-5 US non-farm payrolls (LHS) US GDP growth (RHS) Source: BEA, RICS Economics 16 September 16

7 Housing Market: Activity likely to slow, but tight supply supporting prices The July RICS Residential Market Survey showed a further reduction in the net balance of respondents reporting price rises, which points to a sharp slowdown in price growth over the rest of this year. While HMRC tranaction data showed that activity remained steady in July, mortgage approvals drifted down and RICS lead indicators point to a further slowdown. 8 Net balance, % RICS Price Balance and ONS UK House Price Index 17 6 's RICS Sales Expectations and Mortgage Approvals Net balance, % RICS price balance (Adv. 6 months - LHS) House price index (RHS) BBA mortgage approvals (LHS) RICS sales expectations (Adv. 3 months - RHS) Sources: RICS, ONS Source:RICS, BBA Surveyors expectations for price growth over the coming 1 months have risen slightly following the initial shock of the Brexit vote. In July, 3% more contributors forecast prices to rise rather than fall. While the full impact of the Brexit vote is yet to be felt, the low level of stock available for sale and record high employment will provide a support to prices. 1 RICS 1 Month Price Expectations Net balance, % Feb-1 Feb-11 Feb-1 Feb-13 Feb-14 Feb-15 Feb-16 Source: RICS RICS New Buyer Employment, Enquiries Stock Plus for New Sale I nstructions and UK House and Prices Land Registry Sales Index Index 1 8 Net balance % Full-time employment per hosue for sale (Adv. 9 months - LHS) Land Registry house price index (RHS) NBE Plus NI (3m av. Adv. 6 months) Land Registry Sales smoothed (RHS) Source: RICS, ONS, Land Registry 7 RICS Economics 16 September 16

8 Commercial Property: Prices begin to fall as uncertainty weighs on activity The total value of UK commercial property reached a record high in recent quarters. 9 bn IPF Commercial Property Universe* Uncertainty brought on by the UK s vote to leave the EU has led to a sharp fall in activity in the investment market and the result will continue to weigh on transaction levels in the coming quarters. -.5 UK Economic Uncertainty and Commercial Property Investment Annual change in index % change (4 quarter sum) More uncertainty *year end value Source: IPF, PMRECON estimates using VOA, Scottish Government, and IPD data UK economic uncertainty index* (Adv. 6 months - LHS) -5.5 RCA UK Commercial Property Transactions (RLS) *Index of financial, consumer, business and policy uncertainty Source: RCA, CBI, EC, FTSE, GFK, EPU Capital values fell by 3.3% in July (erasing gains made over the previous year). RICS lead indicators point to further declines ahead. Rental values are also expected to fall over the year to come but the medium term outlook is for modest growth. 6 4 Net balance, % RICS Investment Enquiries and CBRE Capital Values 4 3 Expected % change RICS UK Rent Expectations RICS investment enquiries (Adv. 9 months - LHS) CBRE capital values (RHS) month 3 year (average annual) Source: RICS, CBRE -3 Prime Office Secondary Office Prime Industrial Secondary Industrial Prime Retail Secondary Retail Average Source: RICS 8 RICS Economics 16 September 16

9 Construction Sector: Broad-based fall in output in Q Recent survey data points to a sharp slowdown in activity with the Markit PMI hitting a 7 year low. Official output data for Q show a widespread slowdown across most sectors. Index (>5 indicates growth) Markit Construction PMI 1 Quarterly % change UK Construction Output Source: Markit -8 Pub. House Priv. House Infra. Pub. Other Priv. Ind Priv. Comm All R&M Total Source: ONS English housing starts have been on a very gradual upward trend over the last year but recent RICS survey data points to a slowdown. Reduced investor demand for commercial property will lead to a slowdown in development activity. RICS Private Housing Workloads and English Private Housing Starts RICS Commercial Investor Demand and Commercial/Industrial Construction Orders 8 Net balance, % 6 Net balance, % Net balance, % RICS adjusted private housing workloads* (Adv. 3 months - LHS) England private housing starts (RHS) *current quarter minus same quarter a year ago Source: RICS, DCLG RICS commercial investor demand (Adv. 6 months - LHS) -8 UK commercial and industrial construction orders (RHS) Source: RICS, ONS 9 RICS Economics 16 September 16

10 Market Surveys & Reports Why the RICS surveys? The RICS poll - considered one of the most reliable guides to movements in house prices. Financial Times The RICS survey - the best short-term lead indicator of house prices and activity in our view. Goldman Sachs The RICS Survey has been a good leading indicator for the direction of and inflection points in the IPD index, and therefore the UK commercial property market overall. Morgan Stanley The RICS Commercial Property Survey is an excellent predictor of future IPD total returns. North Row Capital Download RICS Economic market surveys and reports at www. UK Residential Market Survey (monthly) UK Construction Market Survey (quarterly) UK Commercial Market Survey (quarterly) UK Rural Market Survey (semi-annual) Global Commercial Market Monitor (quarterly) RICS / Ci Portuguese Housing Market Survey (monthly) Hong Kong Residential Market Survey (monthly) Canada Construction Market Survey (quarterly) The Economics Team Simon Rubinsohn, Chief Economist srubinsohn@rics.org +44 () Jeffrey Matsu, Senior Economist jmatsu@rics.org +44 () Michael Hanley, Economist mhanley@rics.org, +44 () Tarrant Parsons, Economist tparsons@rics.org, + 44 () Janet Guilfoyle, Surveys Administrator jguilfoyle@rics.org, +44 () Advertising & sponsorship opportunities If your company or organisation is interested in being associated with this publication and you would like to discuss potential opportunities, please contact us at economics@rics.org 1 RICS Economics 16 September 16

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