RBS: Last week in summary |
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| Economy | |
| Written by RBS Group Economics | |
| Monday, 29 June 2009 | |
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Latest housing and economic data in summary.
RBS (LON:RBS) Group Economics gives a summary of the important economic news of last week: Deposits grew only marginally in the first five months of this year, by £326m, a somewhat poor performance compared to the £15bn in the five months to May 2008. Given the lack of incentive to save from low interest rates and the need to pay down debt, this is perhaps unsurprising. Low interest rates are helping to stabilise the housing market a little. Data from the British Bankers Association (BBA) showed that mortgage approvals for house purchase rose again in May, reaching 31K, the highest they have been in over a year. Approvals for remortgaging fell though, as the decline in lenders’ Standard Variable Rates (SVRs) has lowered the incentive for borrowers to refinance when current deals expire. It is unclear how long the decline in remortgaging will last. Market swap rates (used to price fixed rate mortgages) have risen since their April lows, pushing up the cost of fixed rate deals. Despite the increased costs, if they anticipate further rate rises, home owners may be encouraged to take out fixed rate deals. More encouragingly, existing borrowers are benefiting from lower interest rates. As a result, the Council of Mortgage Lenders has reduced its forecast for repossessions in 2009 from 75K to 65K. This is still more than 50% higher than in 2008, but below the peak in the last recession. Signs of encouragement also came out of the US. Durable goods orders jumped 1.8% m/m in May, after a similar gain in April. Orders excluding aircraft and defence are less volatile and give a better indication of companies underlying investment intentions. This measure rose 4.8% m/m, the strongest monthly gain since September 2004. Investment is firming, but from an extremely low base. On this measure, orders are still down 22% on last year. Last week’s statement after the Federal Reserve’s rate setting meeting was largely as expected. The Fed confirmed that interest rates are likely to stay at their exceptionally low levels “for an extended period", and that it would continue with the asset purchase scheme in its current form. In an effort to keep mortgage rates low, the Federal Reserve is already committed to buying up to $1.25 trillion of agency guaranteed mortgage debt and up to $300bn of treasury bills. So far, the Fed is about half way through this process. The flash PMI for the euro area for June showed a fractional improvement. The composite PMI, a good early indicator of activity, rose marginally to 44.4 this month, some way up from February's low of 36 but still stubbornly below the 50-mark that would signal a return to growth. The different pressures on the euro area mean the performance of countries within the single currency area is not identical. Germany is still reeling from the decline in external demand that has knocked the wind out of its export sector while countries like Ireland and Italy are adjusting after large property bubble bursts and recent sovereign credit rating downgrades. Indeed, house prices in Ireland continued their downward spiral in May matching the kind of declines we have seen in the UK. Prices have dropped 21% since their peak in February 2007 and now stand at the same level they were in mid-2004. Low levels of demand and a supply overhang suggest the market has some way to go before it reaches a bottom. As prices have risen four-fold since 1996, while incomes have not even doubled, affordability was stretched. With a deep recession underway income growth is unlikely, leaving prices to make most of the adjustment. Finally, inflation in Japan hit a seven year low this month. Consumer prices dropped 1.1% in June compared to a year ago, in the fourth and steepest decline so far this year. Deflation, a sustained period of falling prices, looks like it has returned to Japan. And whilst it is not a pleasant bed-fellow, it is a familiar one. In the last decade prices have only increased in 29 months compared to a year earlier, but have fallen in 85 months.
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