The Saturday Economist – service sector and car sales head recovery

The Saturday Economist 6th April

Economics news – service sector and car sales lead recovery

On Thursday, the Bank of England’s Monetary Policy Committee voted to maintain the Bank Rate at 0.5% and to maintain the stock of asset purchases (QE) at £375 billion. Despite glum news on construction and manufacturing, no change in the monetary policy stance had been anticipated. Rates have now been on hold since March 2009, an incredible four years. The minutes of the meeting to be released on the 17th of the month may reveal a partial schism on QE but not much else. UK Markets moved lower and gilt rates fell this week but is it time to think about a rise in rates?

UK Services – increasing at fastest rate for seven months …
Last week, the ONS reported the Index of Services output increased by 0.8% in January 2013. The good news in the sector continued this week. The Markit/CIPS Services PMI® Business Activity Index registered 52.4 in March. That was up from February’s 51.8, the fastest growth of UK service sector output for seven months. Strong growth in services, with no evidence of inflation, a dream ticket for the MPC.

UK Car Sales – rose by 5.9% in March …
UK new car registrations rose 5.9% in March with 394,806 registrations of the new 2013-plate cars. Registrations in the first quarter increased by 7.4% to 605,000. SMMT Interim Chief Executive, Mike Baunton said, “Growth in the market is an encouraging sign of returning consumer confidence as motorists are attracted to forecourts by new models and the latest technologies.” Yeah, that and innovative financing models for private and company fleet buyers but …

Manufacturing – faces lack lustre demand …
Rising car sales achieved little for UK manufacturing as the sector contracted for the second successive month in March. According to the Markit/CIPS Purchasing Manager’s Index® (PMI®), companies scaled back production in response to lacklustre demand from both domestic and overseas markets. (Note few are making cars anymore or involved in the supply chain, despite the success of Bentley and Jaguar LandRover). The PMI® index edged higher to 48.3 from February’s four-month low of 47.9 but still below the critical 50 mark.

Construction – declined at a slower rate …
Good news on construction? Not really, the Markit/CIPS UK Construction PMI® index noted a slower decline in output for the month of March. The seasonally adjusted index edged higher to 48.3. The average reading over Q1 2013 as a whole of 49.0 was slightly below that for the final quarter of last year 49.2.

What’s happening to housing?
House prices in the first three months of 2013 were 1.2% higher than in the final three months of 2012, according to the latest Halifax House Price Index. Signs of market improvement? Perhaps. Home sales increased by 5% between January and February according to the latest industry figures. Sales in February, at 85,710, were 10% higher than in February 2012. However, the number of mortgage approvals fell by 5% between January and February to the lowest level since September 2012. For the moment, the news on housing is mixed but rising prices will lead to a higher volume of activity as the real cost of borrowing falls. Innovative financing models with low deposit, buyback style,  price insurance would help.

Overall prospects
The car market is moving, service sector growth is rising. Service sector growth in the year will offset the weakness in manufacturing and construction. If the housing market starts to move, the policy stance should edge to higher rates and possibly much earlier than anyone thinks. Clearly the markets didn’t think so this week….

What’s happened to Sterling?
Sterling slipped this week from 1.1862 to 1.1787 against the euro but moved up against the dollar at 1.5335 from 1.5211. The dollar closed against the euro at 1.2989 from 1.2818.

Oil Price Brent Crude closed down to $104.12 from $110.02.

Markets, The Dow closed unchanged at 14.565 from 14,578 but the FTSE closed up down at 6,245 from 6,412.

UK gilt yields (10 year) fell to 1.65 from 1.78 and US gilts closed at 1.71 from 1.85, heading in the wrong direction at this stage in the cycle!

That’s all for this week, don’t miss The Sunday Times and Croissants out tomorrow. 
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