Distressing Data
06 / Jul / 2008
We were expecting some particularly disappointing figures last week and the reality was, if anything worse than analysts had predicted. The Bank of England’s own mortgage approvals figures confirmed the recent deceleration in activity, 42,000 in May against 58,000 in April. More interestingly, consumer credit advanced by only 0.6% last month (7.00% in the year) which seems at odds with last months retails sales volumes numbers. Unsurprisingly the GfK/NOP consumer confidence survey crashed to a balance of –34, the only time we have been more miserable was the depths of recession of the early 1990’s. The Nationwide reported that on their statistics house prices declined last month (for the 8th month running) by 0.9% giving an annual fall of 6.3%. The Committee’s arch-dove, David Blanchflower, is of the opinion now that the Bank needs to radically soften monetary policy to avoid a house price crash and the resultant effect on domestic demand. However, mortgage lenders will not pass on the bulk of any Base Rate cuts given their own P+L and balance sheet problems and so reductions in Base Rate would have little immediate effect.
There is little new data available to the markets this week; this morning sees the release of June’s industrial production and manufacturing output numbers and the Bank announces its Base Rate decision on Thursday. This morning’s figures are expected to show both monthly and annual declines in both measures reflecting both increased costs and declining demand in domestic, EU and US markets.
It is difficult to see what option the Bank has other than to maintain Base Rate at 5.00%. Any reduction may improve subsequent Gfk/NOP results but the effect on the real economy will almost zero given rising commodity prices. An increase though would almost certainly be passed on in full thus forcing house prices and demand lower, increasing insolvencies and pushing the UK into an outright recession.