What will UK GDP numbers tell us?

The Q1 UK GDP numbers are out today, and there’s lots of debate as to whether we’ve experienced a triple dip recession, with negative growth in the quarter. The numbers out today can be revised twice more and are not the most accurate view of the economy in any case given the vagaries of data collection, but they will affect perspectives of policy initiatives and broader sentiment. So however mis-placed the conclusion, markets may decide that if the number’s materially weak, there’s more QE on the way – and therefore more near term support for gilts.

In terms of what the numbers will likely be, it’s difficult to be precise, but on balance a positive number of perhaps 0.1% looks possible, so the ‘triple dip’ avoided. This outcome would reflect the relative buoyancy of retail sales data and it’s clear from the Sports Direct results that some parts of retail have done genuinely well. In contrast, in the past year, construction has been a substantial headwind to growth, subtracting 0.6% from GDP in 2012. It is also one of the downside pressures in Q1, but it may well be that construction output has now reached its trough with scope to support GDP in the near term, given that we can calculate that GDP growth excluding construction is running slightly below 1% year on year.

Looking forward, it’s hard to predict a strong upturn but the growth picture is affected by policy and there is current concerted effort to increase housing market activity and residential construction output with the Funding for Lending Scheme (FLS) and the Help to Buy (HTB) initiatives announced in the Budget. For context, the FLS was put in place in July 2012 and since then quoted two year fixed 75% loan-to-value (LTV) mortgage rates have fallen by around 80bps. HTB was planned to be in operation from April 2013 for a three year period, and essentially allows individuals with a 5% deposit to access 75% LTV mortgages on new build homes with the help of a government loan. This builds upon a previous government initiative called First Buy, and is expected to support 74,000 home buyers (according to figures from the Budget).

All well and good, but the problem is that thus far, the actual volume of lending by banks remains muted. The ‘good news’ is that these policy measures now act helpfully on both sides of banks’ balance sheets with the FLS designed to reduce the funding costs (liabilities) of banks and the HTB schemes essentially limiting the risk of bank loans (assets) by reducing LTV ratios from what they would otherwise be. Extending the scheme to cover buy-to-let will irritate those for whom the focus should be on helping people find and afford a home, but for a government desperate for growth it is likely helpful. And growth is essential to the fiscal arithmetic. If ‘austerity’ drives down revenue at least as fast as costs, it cannot solve the government debt burden problem, and confidence is critical here too. It’s worth bearing in mind that whilst government and private individuals have way too much debt, corporations in aggregate have stronger balance sheets than ever before – but don’t have the confidence to invest.

As to what we might expect in the period ahead, with such a concerted action, we should expect mortgage lending to start improving. Of course it will take time for these policies to have an effect, with large construction firms likely to remain cautious about undertaking large house building projects and likely to move slowly even when they do decide to act. There’s the added issue that house building per se actually only accounts for slightly above 1% of GDP. This means that very large growth rates would be required for this sector to have a meaningful direct impact on overall economic growth, but second order effects from a pick-up in housing market activity, such as increases in repair and maintenance spending, and increased confidence of households, could lead to a large impact on headline GDP. Meanwhile there is tentative evidence in Bank of England surveys of a pick-up in secondary market activity and there is also evidence that current rental yields are above historical averages which taken in conjunction with low mortgage rates, should make purchasing a house an increasingly attractive option for those currently renting.

Overall, we anticipate stabilisation and then meaningful pick-up in housing market activity and construction in the medium term. This should help the UK achieve faster growth in the next few years. As an added point, private sector housing repair and maintenance, as well as other private sector non-housing construction, are at levels close to the 2008/09 crisis lows. This suggests that there is little room for output in these sectors to fall further, and even stabilisation alone should present allow GDP to climb vs 2012’s outcome.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccl