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Martin Beck, chief economic advisor to the EY ITEM Club, is expecting a double-digit drop in house prices this year as the market cools rapidly.
The financial market turmoil that followed late-September’s mini-Budget had largely disappeared by the start of November. However, the more stable financial market backdrop offered no support to the housing market, with mortgage approvals falling to 46,075 in November, from 57,875 in October. Excluding the pandemic periods, this was the lowest level since April 2011.
Net mortgage lending of £4.4bn was up on October’s level, but this was a legacy of transactions set in train earlier. The EY Item Club expects that both lending flows and residential transactions are likely to fall back in Q1 2023. Indeed, though the financial market backdrop has improved, it has only reduced the extent to which house price valuations, based on mortgage affordability, are stretched, so the EY Item Club expects that a double-digit correction in prices remains likely.
Data on unsecured lending and household deposits continue to give the impression that consumers have limited appetite to push against the pressures of falling real incomes by borrowing more or saving less. Though net unsecured lending rose to £1.5bn in November, from £0.7bn in October, this was entirely due to a notable drop in repayments, with gross lending falling back. And households added £5.7bn to their stock of deposits in November, well above the pre-pandemic norm of £4.2bn a month.
However, there are reasons to be cheerful. Beck adds:
On balance, the EY Item Club still thinks that consumer savings will come to at least the partial aid of the economy. The financial turmoil from late last year may have encouraged greater precautionary saving, but conditions have calmed on those fronts. Survey evidence collected by the Bank of England just before the mini-Budget found that higher-income households are reducing their monthly savings to cut back spending by less. And other major economies, notably the US, have seen excess savings drawn down to a significant extent.
Here’s more reaction to the sharp drop in UK mortgage approvals in November.
JPMorgan economist Allan Monks says:
Approvals began declining following the political turmoil seen during September and October. November brought some political and market stability, although mortgage rates remained high, the market remained disrupted, new buyer enquiries were still low, and house price declines accelerated in the month.
The question is whether this downward spiral will continue, or instead give way to some form of stability. We expect house prices to fall further and for housing market conditions to remain weak, but there is still a case for expecting an element of the latter in the near term.
First, market conditions have stabilised and mortgage rates have fallen back from the highs. Although the November data show show that quoted mortgage rates remained stuck near 6%, timelier web based data currently show rates down closer to 4.50-4.75%. This improvement is likely to be limited by further BoE tightening, although we do expect the Bank to pause after 1Q.
Second, the labor market is broadly holding in as wage growth remains outright strong, and signs of a genuine recession dynamic remain absent. This could change, but the PMI moved further away from recession levels in December, job vacancies remain high and consumer confidence has now shown three consecutive monthly increases through to December. The RICS housing survey helps to track momentum. This survey continues to highlight falling prices and declining demand. But a limited supply of property also appears to be keeping the market tight, while new buyer enquires did show a modest move higher in November.
Sacha Lord, the night time economy adviser for Greater Manchester, has called for support “at its fullest” to be offered beyond March, when the current energy support scheme for businesses expires.
He said:
I am encouraged to see efforts being made by the chancellor today to meet with business groups and understand the battles being faced across the board.
We need a clear, urgent and defined strategy outlining how business owners across the UK can survive the expected surge in costs.
Support at its fullest must be maintained for UK companies when the current scheme comes to an end in March to prevent closures, and I urge the chancellor to understand the depths of the crisis and listen to the swathes of business voices across all industries calling for help.
The UK’s industry sectors are intertwined, and after the jolts of the past three years and the resolve that all industries have shown in their bid for recovery, it would be a failure of this new government to simply stand by and let business fall at the last hurdle.
British Gas owner asks Citizens Advice for help in protecting rivals’ customers
Alex Lawson
Also on the energy front, British Gas owner Centrica has expressed “profound concern” over the financial resilience of some of its competitors in the domestic energy market and has written to Citizens Advice to ask for support in its efforts to protect consumers.
Centrica’s group general counsel, Raj Roy, has written to the charity’s chief, Dame Clare Moriarty, to voice concerns over the regulator Ofgem’s recent consultation on the financial health of energy suppliers.
Centrica wants Citizens Advice to add its weight to calls to disclose whether a customer’s credit balance is fully protected on their bill from a supplier going bust, and hopes planned minimum capital requirements can be introduced more quickly.
Ofgem is attempting to prevent a repeat of the circumstances that resulted in nearly 30 suppliers collapsing over the past two years at a cost of £2.7bn to taxpayers, plus billions more to cover the bailout of the biggest casualty, Bulb.
Chemical industry chief: ‘Widespread concern’ over cut in energy support
As the government prepares to cut the help with energy bills it is giving businesses, with Jeremy Hunt, the chancellor, expected to meet leaders from the UK’s biggest business groups at lunchtime, the chief executive of the Chemical Industries Association has talked about the industry’s worries.
Asked on BBC Radio 4’s Today programme how concerned the association’s members are that energy support will fall, Stephen Elliott said:
There would be a lot of widespread concern over a significant reduction in the level of support.
Credit where credit’s due. The relief measures from October last year through to March have made a difference. They have helped business.
He added:
Only last week we actually got confirmation that some businesses were actually included within the scope of that relief, so it’s taken time for some clarity”.
We’re very interested to learn about what will happen from the end of March.
Throughout 2021, and pre the Russian invasion, we’ve been looking for more targeted support with government. More can be done for a targeted intervention for energy intensive sectors such as chemicals.
Disabled people among hardest hit by cost of living crisis
Richard Partington
Disabled people in the UK are much more likely to struggle to heat their homes and cut back on food this winter, according to a report highlighting “massive” income gaps amid the cost of living squeeze.
Research from the Resolution Foundation found people with disabilities had an available amount to spend that was about 44% lower than that of other working-age adults, exposing them hugely to the rising cost of essentials.
The thinktank said there was a chasm between the underlying disposable incomes of people with a disability (£19,397 a year) and the non-disabled population (£27,792), according to analysis of official figures and a YouGov survey of just under 8,000 working-age adults, more than 2,000 of whom reported a long-term illness or disability.
Highlighting the risks to households struggling with the highest rates of inflation since the early 1980s, it said almost half (48%) of disabled adults said they had to cut back on energy use this winter, compared with almost one-third of people without a disability.
UK households spent £1.1bn more on groceries in December for fewer items
Sarah Butler
Households in the UK spent £1.1bn more on groceries in December than a year earlier, taking Christmas spending to a record £12.8bn, but got fewer items in their baskets as rampant inflation hit home.
Many stocked up on alcohol to enjoy while watching the men’s football World Cup, with sales of beer reaching the highest level for the year on the day of England’s quarter-final against France on 10 December.
However, the most popular shopping day of the year was Friday 23 December – when more than half of households went to stores or received a delivery.
Last month was the busiest in supermarkets since the coronavirus pandemic, with online sales accounting for a lower proportion of the total festive blowout than last year.
Anthony Codlling, an independent housing analyst, has looked at the fall in UK mortgage approvals.
This was a big drop. Mortgage approvals fell by 11,800 in November, the biggest fall since April 2020 and are at their lowest level since June 2020. This is not the news the housing market was hoping for in the first week of the new year.
Mortgage approvals are the key lead indicator for housing transactions, lower mortgage approvals today means fewer housing transactions tomorrow. A reduction in housing transactions will hurt all those businesses that are involved in the home-moving process, but the absence of forced sellers implies that house prices will not fall as far or as fast as housing transactions.
UK mortgage approvals in biggest drop since 2020; consumers go on £1.5bn borrowing binge
Back in the UK, mortgage approvals fell to the lowest level since mid-2020 in November, while consumers embarked on a £1.5bn borrowing binge, most of it on credit cards, in a sign that the cost of living crisis is worsening.
UK banks and building societies approved 46,100 mortgages for house purchase in November, the lowest number since June 2020, according to the latest Bank of England stats.
The housing market has been cooling markedly after two years of buoyancy through the Covid pandemic, when house price gains were underpinned by a tax break and and an exodus from big cities to greener surroundings prompted by the rise in home working.
The key points:
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Net borrowing of mortgage debt by individuals increased from £3.6bn to £4.4bn in November.
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Mortgage approvals for house purchases decreased to 46,100 in November from 57,900 in October, the lowest level since June 2020 (40,500).
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The ‘effective’ interest rate – the actual interest rate paid – on newly drawn mortgages increased by 26 basis points, to 3.35% in November.
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Consumers borrowed an additional £1.5bn in consumer credit, on net, above the £700m borrowed in October – driven by an additional £1.2bn of credit card borrowing.
Eurozone downturn eases as price pressures cool
The economic downturn in the eurozone eased in December as price pressures cooled, a survey has shown.
The final reading from S&P Global, which publishes monthly purchasing managers index reports, shows the composite output index for the eurozone rose to 49.3, still in negative territory, but at a five-month high. Activity in the services industry was at a four-month high, with the index at 49.8, just below the 50 mark that separates expansion from contraction. Manufacturing was once again the main drag on growth.
Joe Hayes, senior economist at S&P Global Market Intelligence said:
The eurozone economy continued to deteriorate in December, but the strength of the downturn moderated for a second successive month, tentatively pointing to a contraction in the economy that may be milder than was initially anticipated. Weaker declines were also seen broadly across the euro area nations, and most notably in Germany, whose economy has been the primary drag on the eurozone as a whole in the second half of this year.
Cooling price pressures have helped temper the decline in economic activity levels. A particularly marked slowdown in manufacturing inflation bodes well for other sectors of the economy, although this has partly been down to relatively benign developments across European energy markets at the end of 2022. Services inflation remains stickier for now, reflecting a sharp rise in labour costs, which continued to be pushed up by continued hiring efforts.
Nevertheless, there is little evidence across the survey results to suggest the eurozone economy may return to meaningful and stable growth any time soon. Demand conditions remained fragile as clients have retrenched, while business confidence remains bogged down by recession concerns, energy cost uncertainty and persistently high inflation and a tightening of financial conditions.
While Spain’s service sector recorded modest growth in December for the second month and input costs eased, French output fell for the second month in a row, and input cost inflation remained “stubbornly elevated,” according to S&P Global.
Its France services business activity index was at 49.5 in December versus November’s 49.3.
In Germany, Europe’s largest economy, services activity remained in negative territory, but firms reported a slower decline, with the index ticking up to a five-month high of 49.2.
In Italy, things improved with the services business activity index rising to 49.9 from 49.5 in November, only just below the neutral level of 50, with firms reporting the first rise in new work since June.
Brompton to shift parts of its supply chain out of Taiwan and China
Brompton Bicycle, Britain’s biggest bike maker, has decided to shift parts of its supply chain out of Taiwan and China, as tensions grow between the two countries, with fears that China could invade its smaller neighbour. Taiwan is one of the biggest exporters of bicycle parts in the world.
The news was first reported by the Daily Telegraph. A third of Brompton’s suppliers are in Asia, with the rest in Europe.
Will Butler-Adams, managing director of Brompton, which is known for its folding bikes, said on BBC radio 4’s Today programme:
It’s pretty prudent because there are are risks in the region. Particularly vulnerable is Taiwan, more so than China. It’s trying to find a way – and we’ve been through a fairly tormentous two or three years with all sorts of wider supply chain challenges because of Covid – but also to think about how we deal with supply for risk – that let’s hope we all think is relatively low – but it does exist.
For our business, we’re getting to a size where we have the size to be able to deal with supply. But it comes at a cost, you need to have a certain amount of scale to do that. When you’re smaller, you just don’t have the scale.
The move to dual supply, a backup, as two different places can make the parts, is only possible because the business is big enough to cope with the increased cost, he explained. He added that many Chinese manufacturers are setting up operations in other parts of Asia such as Vietnam or Thailand, so the move doesn’t necessarily mean that Brompton will be switching suppliers.
But what’s interesting is, particularly in Taiwan, a lot of Chinese manufacturers themselves are setting up other operations in other parts of Asia, so it’s not like you’re going to a completely new supplier to try and find those parts.
Your existing supplier who can also see there are risks and also can feel some demand and pressure from their customers is going: ‘right, we’ll set up an operation in Vietnam or in Thailand’ – and that’s a much better route. You’re dealing with someone who already understands your product, already has specialist equipment… and therefore you’ve got dual supply through the same company.
Having just been through Covid, if Taiwan is in a lockdown but Vietnam isn’t, you can still get parts. It’s not just about the political friction, there are all sorts of good reasons to have more than one supplier geographically for your key components.
Spain’s service sector enjoyed modest growth in December for a second month, with growth in jobs, while cost inflation eased noticeably.
The monthly business activity index from S&P Global rose to 51.6 last month from 51.2 in November, above the 50 mark that divides expansion from contraction. This marked the strongest growth in the service sector since July.
Service firms in Spain were willing to take on more staff for a third month running. Input price inflation eased to its lowest level since August, but prices overall are still increasing at a substantial pace, the survey showed.
Paul Smith, economics director at S&P Global Market Intelligence, said:
The Spanish service sector more than held its ground at the end of year, registering back-to-back rises in activity and new business. Although modest, when viewed through the prism of widespread cost pressures and ongoing economic uncertainty, the latest data point to reasonable sector performance, even more so when we add in another month of employment gains.
However, ongoing high inflation and reports of suppliers seeking to repair margins add to worries that price pressures will remain elevated and weigh on activity and consumption for some time to come. Indeed, this remains the overwhelming worry for many firms at the start of 2023, and as a result, confidence in the outlook remained historically subdued.
French inflation slows
In France, inflation slowed to 6.7% in December compared with 7.1% in November – but not as much as economists expected. They had pencilled in a drop to 6.4%.
The preliminary figures were released by France’s statistics office Insee. That’s inflation measured by the harmonised index of consumer prices, an internationally comparable measure. The national consumer price index rose by 5.9% in December, following November’s 6.2% annual rate.
French inflation is far below that seen in the UK (10.7% in November) and Germany, where provisional figures yesterday showed inflation cooled to to 8.6% in December, from 10% in November and 10.4% in October.
The French government has moved quickly to cap energy prices, which have risen a lot less than in the UK as a result. This hasn’t come cheap – it is reportedly spending more than €85bn on energy support measures.
In the UK, a typical household energy bill has been capped at £2,500 a year, but this is still a lot more than people paid before the energy crisis.
European shares perform hat-trick
While US indices were hit by the tech rout yesterday, European shares have performed a hat-trick, rising for the third day in the new year.
The German Dax and the Spanish Ibex both rose 0.6% in early trading, the French CAC was up 0.7% and the FTSE MiB gained 0.5%. The broader Euro Stoxx index also advanced 0.6%.
In London, the FTSE 100 index, which was closed on Monday for the New Year’s bank holiday, eked out a 0.15% gain this morning, rising 10 points to 7,565. Prime minister Rishi Sunak will set out his priorities for 2023 in a speech later today.
Tesla sells off 12%, Apple’s market value falls below $2tn in tech rout
In yesterday’s tech rout on Wall Street, Tesla shares slumped 12%, the latest sell-off after a bad year for the electric carmaker’s share price.
Apple shares fell 3.7%, and its market value dropped to $1.99bn. Its value declined by a staggering $1tn over 2022, with investors worrying about disruption to its China-based factories.
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, says:
On Wall Street stocks started the year on a downbeat note, with Tesla and Apple leading the pack downwards amid worries that sales will take a hit as consumer wariness rises during the downturn. The minutes of the latest Federal Reserve meeting will be devoured later, in a search for clues about how much higher rates will go, before policymakers consider pressing the pause button.
Naeem Aslam, chief market analyst at trading platform Ava Trade, says:
Tesla’s stock price plunged another 12% and continued its year-long sell-off that took place in 2022. Of course, the primary reason behind the fresh sell-off was its car delivery numbers which were much softer than the market expectations. Wall Street was expecting the number to be near the 427K mark for the fourth quarter of the last year when the company reported 405,278K. If you look at the numbers, the difference isn’t ocean’s apart. The softness in the numbers can be blamed to a number of factors, such as higher inflation which has made consumers wary about their spending. Higher interest rates is another factor that consumers are mindful of before committing to a monthly payment.
Smart money believes that most of the bad news for Tesla is already priced in, such as the shaky deal that Elon Musk announced about buying Twitter for $44bn, which made him to sell a large portion of his stock in Tesla. In addition, Elon has been distracted or less focused on the company’s core product due to the stress of taking another company under his wing. Allocation of sources from Tesla to Twitter and the process of finding an appropriate CEO for Twitter.
Introduction: UK chancellor expected to meet business leaders to discuss energy support
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The UK chancellor, Jeremy Hunt, is expected to meet with business groups at lunchtime to discuss the government’s energy support after March. Business leaders fear the government will halve its help with energy bills.
The Federation of Small Businesses, UK Hospitality, the CBI and the British Chambers of Commerce are all expected to attend the meeting, the BBC reported.
There is more disruption on the railway as people return to work after the Christmas break, the second of five days of rail strikes. Only one in five UK train services is expected to run today.
Food prices in the UK jumped to a record rate in December, prompting warnings of “another difficult year for consumers and businesses” as inflation shows no immediate signs of waning. The British Retail Consortium said annual food inflation rose to 13.3% in December from 12.4% in November.
It explained that high prices for animal feed, fertiliser and energy fed into higher food prices on supermarket shelves, and warned that consumers would probably face further increases in 2023. Non-food items became slightly cheaper as retailers offered discounts to try and shift stock, and the overall shop price inflation figure eased a little, to 7.3% from 7.4%.
On Wall Street, technology shares sold off on Tuesday led by Tesla. Its shares slid 12% on fears about weakening demand and logistical problems, after the electric carmaker missed market expectations for fourth-quarter deliveries despite shipping a record number of vehicles.
Apple’s share price also suffered and ended the day 3.7% lower, taking its market value below $2 trillion. It’s in stark contrast to the beginning of last year, when the iPhone maker became the only company ever to reach a $3tn valuation. Investors are worried about disruptions to its factories in China because of the Covid wave there.
The Nasdaq closed 0.76% lower while the S&P 500 lost 0.4%.
In Asia, Japan’s Nikkei dropped 1.45%, while Hong Kong’s Hang Seng rose 2.8% and the Australian and South Korean markets gained about 1.6% each.
For financial markets, the main event today is the release of the minutes of the US Federal’s December meeting, when it raised interest rates by 50 basis points and cautioned rates may need to remain higher for longer.
The Agenda
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7.45am GMT: France inflation for December (forecast: 6.4%)
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8.45am GMT – 9am GMT: Italy, France, Germany, Eurozone S&P global services PMIs final for December
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9.30am GMT: UK Mortgage approvals and consumer credit for November
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3pm GMT: US ISM Manufacturing PMI for December (forecast: 48.5)
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7pm GMT: US Federal Reserve minutes
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