Manufacturing Rally ... Are Car Makers Driving Growth?
Manufacturing output increased in July according to the latest data from the ONS. The year on year increase was 1.9%, a strong rally from the dismal performance in the second quarter. Transport output increased by almost 8% in the month. The SMMT reported an 8% increase in car manufacturing in July, by way of explanation.
In August, it just got bettter! According to the Markit/CIPS manufacturing survey, growth in the sector gathered pace as new order inflows increased. Domestic demand was the prime source of new contract wins. Growth in Europe and the rest of the world, is also stimulating demand.
Should we get too excited? Not really. We expected a strong performance in the third quarter, softening towards the end of the year. Car output is down by almost 2% year to date. We expect U.K. registrations to fall by 2.5% this year. The domestic market was a contributing source of the surge in July, up by 18% year on year. For the year as a whole we expect manufacturing output to increase by 1.5%, up from less than 1% last year. Better than last year but no real "march of the makers" re balancing the economy.
So what of Construction?
Construction output was flat in July. Strong growth in housing, including public sector housing, was offset by weakness in infrastructure and other public sector projects. Private sector investment in commercial property continues to offset significant weakness in industrial projects. It has been a similar story throughout the year. For the year as a whole we expect construction growth of around 1.4%, down from 2.4% last year. Unless and until the government commits to real infrastucture expansion, construction will remain subdued into 2018.
House Prices ... rise and fall on Planet ZIRP ...
The rate of house price increases fell in August, according to Nationwide. The rate of increase fell in the month to 2.1% from 2.9% prior month. Should we worry about a house price collapse? Not really! According to the Halifax House price index, house prices increased by 2.6% in August, up from 2.1% in July.
New mortgage applications suggest underlying demand strength in the market. "House prices should continue to be supported by low mortgage rates and a continuing shortage of properties for sale", according to Russell Gailey, Managing Director of the Halifax Community Bank.
We expect the overall rate of house price inflation to average 2.4% in the final quarter, down from 6.4% last year. The issue driving the slow down is affordability. The price to earnings ratio is critical over the medium term. Earnings growth of 2.4% is incompatible with a 6.4% growth in house prices on a continuing basis. The Nationwide house price to earnings ratio is over six. The long term average [1987 -2017] is around 4.3. On Planet ZIRP, post 2008, the average has been around 5.5. Yes QE and low rates boost asset prices!
For those hoping for the kids to leave home, leaving Planet ZIRP, will aid the exodus. Higher base rates may lead to higher mortgage costs. The irony is affordability will improve as higher asset prices, including housing are brought back within the confines of market reality!
Don't Miss the Economics Conference on the 13th October. Our theme is the Economics of Greater Manchester. We will be talking about the Inclusive Growth Challenge, Balancing the Books and the Sectors Driving Growth in the City Region! Another Great Conference in the pro-manchester series . We have a great line up of speakers announced this week. Book Now Don't Miss Out ...
That's all for this week. Have a great week-end ...
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.