EY ITEM Club comments on PMI services data “a bitter blow” and lending to individuals data “mixed bag” – out today

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Andrew Goodwin, senior economic adviser to the EY ITEM Club comments on the two sets of economic data, out today:

  • Service sector suffered a distinct loss of momentum in the latter part of 2012
  • GDP likely to be little better than flat in 2012Q4
  • FLS supporting mortgage activity, but it’ll be a slow burn, not a big bang

On PMI services

“This comes as a bitter blow after the upside surprise from the manufacturing survey earlier in the week. The service sector had appeared to be losing momentum through the autumn and, with new business slipping back, there is a risk that this softer patch could persist in the short-term.
 
“Obviously this survey doesn’t cover the entire services sector – retailers have generally been more positive about their performance in the run up to Christmas. However, it does seem likely that with the Olympics boost unwinding, service sector output was probably little better than flat in 2012Q4.
 
“Although the manufacturing PMI in December was encouraging, manufacturing output is likely to have dropped sharply in 2012Q4. As ever, the wild card is the construction sector and for once there is hope that this might provide a boost, moderating any fall in GDP in 2012Q4. 

“Regardless of the outturn for 2012Q4, today’s survey raises wider concerns – the service sector had been practically the only driver of growth during 2012, so this slowdown bodes ill for prospects in 2013.”

On lending to individuals

“The news on mortgage markets is pretty mixed. Though the number of mortgage approvals has continued to rise (albeit not to the same extent that yesterday’s Credit Conditions Survey had indicated) the level of lending is still low. There is also evidence that interest rates are coming down on new mortgages, though at 12bp since August this change is also fairly modest.
 
“We remain cautiously optimistic that the FLS will provide support to the housing market, but it looks like being a slow burn rather than the big bang that the Bank of England seemed to be hoping for. And if the weakness in the wider economy persists, the Bank may be forced to supplement the FLS with a further shot of QE to try and generate some momentum.
 
“There is still little happening in terms of unsecured lending, with households continuing to show a reluctance to rack up further debt. Retailers like John Lewis have reported relatively good results for Christmas, so next month’s lending data will be particularly interesting to see the extent to which consumers have borrowed to finance this. Our sense is that the stronger retail results are probably more a reflection of strong employment growth and lower inflation, rather than an end-of-year splurge on the credit cards.”