ECONOMIC OUTLOOK
MORTGAGE approvals for house purchases reached their highest level in 16 months in August, reaching 41,807 in the month, compared to a monthly average of 41,133 over the preceeding six months. The news suggests that buyers are still active but agents said the market was now being driven more by first-time buyers while buy-to-let investors had played a much smaller role.
The Bank of England has issued a stark warning to UK banks about the need to provide extra cushioning of around £10bn against potential losses on consumer credit in the event of a downturn. The Bank’s Financial Policy Committee warned that consumer credit, rising by around 10% a year, was a “pocket of risk” and said it would announce financial buffers for individual banks after stress-testing them in November, rather than apply the £10bn figure to the entire industry. This is because the risks vary widely from bank to bank. If there was an economic downturn, however, the Bank said some lenders could be hit by £30bn in losses.
The UK’s credit rating was downgraded by Moody’s as the rating agency warned that public finances were under more pressure than the Treasury recognised. The agency said the challenges of Brexit would increase risks for the public finances and complicate policymaking. Brexit was also likely to hit the UK’s economic performance.
However, ONS data showed the UK had its lowest public-sector budget deficit in August since 2007, giving the Government some apparent leeway for potential sweeteners in November’s Budget. The Government borrowed £5.7bn last month, £1.3bn less than a year ago. Borrowing for the first five months of the financial year was £28.3bn, the lowest since 2007-08.
Retail sales volumes were also buoyant in August, up 1% from July and 2.4% year-on-year. The positive surprise showed consumption holding up better than expected in the face of rising inflation, falling real incomes and economic uncertainty ahead of Brexit. Food sales were flat and the contribution from petrol fell, so most of the growth came from non-essential items.
While the figures are well below the annualised 5-6% growth rates seen in late 2016, they are likely to add weight to the argument for a rate hike by the Bank of England, possibly in November.
Elsewhere, the OECD reiterated its forecast of a sharp slowdown in the UK economy in 2018. It forecasts growth of 1.6% for the UK in 2017 but just 1% in 2018 – which would make it the worst performing of the G7 nations.
The US Federal Reserve kept interest rates unchanged at its meeting last Wednesday but announced it would stop its quantitative easing (QE) programme from next month. It indicated that one interest rate rise could come this year, probably in December, with three further hikes in 2018.
The announcement came despite US inflation undershooting its target – a fact that Fed Chair Janet Yellen thinks will straighten itself out as a result of the tightening labour market.