Green shoots thrive as rates of decline start to flatten out

Bank of England's interest rate meeting unlikely to make major changes yet

By Sarah Arnott
Sunday 05 January 2014 04:32

Tentative signs of improvement in the building industry, the wider jobs market and overall consumer confidence form the backdrop to the Bank of England interest rate meeting that starts today.

The construction sector's purchasing managers' index hit its highest level in seven months in April – up to 38.1 from 30.9 the month before, and from a record low of 27.8 in February – according to the Chartered Institute of Purchasing and Supply (CIPS). The second consecutive monthly rise, and at an increased rate, raises hopes that the precipitous pace of decline (output in the first three months plummeted by 2.4 per cent quarter-on-quarter and 8.6 per cent year-on-year) may finally be slowing. But the index is still some way from the 50 rating that separates expansion from contraction.

Simon Rubinsohn, the chief economist at the Royal Institution of Chartered Surveyors, said yesterday: "April did see an improvement but it is still not actual growth. Construction output is still likely to post a double-digit decline over the course of 2009, but the results – allied to some signs of a gentle pick-up in activity in the housing market – hold out the hope that the building industry may begin to stabilise in the early part of 2010."

Meanwhile, consumer confidence is also returning. Nationwide's monthly index for April, also published yesterday, showed an increase of eight points to 50 – its biggest single monthly rise for nearly two years. Not only is overall confidence mounting, but individual indices monitoring the present situation, future expectations and spending are also on an upward trend.

The economy remains unequivocally in recession, and the Chancellor's Budget prediction of a 3.5 per cent decline in gross domestic product this year was widely dismissed as over optimistic. But the upturn in confidence reflects the public perception that the rate of deterioration is easing. House prices are now expected to fall by only 2 per cent this year, compared with March's prediction of a 3 per cent drop.

Again, the improvements are relative. More than a quarter of people (26 per cent) questioned by the Nationwide's researchers thought Britain's economy would improve over the coming six months, while 32 per cent thought it would worsen. Overall, 80 per cent remained gloomy about the economy, slightly less than the 83 per cent figure for March. As redundancies continue to rise, 68 per cent of respondents were gloomy about the jobs market, up from 66 per cent the month before.

Martin Gahbauer, the building society's senior economist, said: "In recent weeks, we have seen a strong rebound in global equity markets and some tentative signs of improvement in housing market indicators. However, it is likely the UK economy will continue to contract for some time yet. It is too early to say whether this trend in confidence will continue into the next month."

There are similar signs in the jobs market. Although vacancies and average wages are still falling, April saw the slowest rate of contraction in permanent and temporary placements in seven months, according to the Recruitment and Employment Confederation.

Such youthful green shoots are not expected push the Bank of England's Monetary Policy Committee into making any major policy decisions at this week's two-day meeting. It is too early to assess the impact of the first two months of the Bank's three-month programme of quantitative easing – injecting £75bn of new money into the economy to free up frozen credit markets – and interest rates are likely to be held at the current 0.5 per cent.

Howard Archer, the chief economist at IHS Global Insight, said yesterday: "Once the economy starts improving significantly, the Bank will be keen to put the interest rate up quite quickly because it won't want to keep it so low any longer than is necessary. But we are a long way from that."

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