Last week saw a spate of data related to the UK economy. What did the runes say?

Alas, the purchasing managers indices for UK manufacturing, services and construction were all down in August. The headline index fell from 56.9 to 54.3. The index has fallen for three months on the trot. Most worrying of all, the index tracking new orders fell from 58.5 to 52.

As for construction, the headline index dropped from 54.1 to 52.1.

And finally, there was services: the headline index from the report, the seasonally adjusted business activity index, dropped to 51.3, down from 53.1 in July. The index indicated the slowest increase of activity in the current growth sequence.

The good news, any score over 50 points to growth, and all the key indices are above this level. But the steady decline, especially in manufacturing, is most worrisome. If September’s manufacturing indices see another month like the last one, then the sector will once again be knocking on the door marked recession.

Meanwhile, the news on house prices was pretty predictable. According to Hometrack, house prices fell 0.3 per cent in August, with the number of new buyers registering with agents falling by 2.2 per cent, while the number of properties listed for sale rose by 2.4 per cent. Hometrack said: “Over the last 5 months the supply of housing for sale has grown by 14 per cent while demand has fallen by 2 per cent.”

Meanwhile, the Nationwide had house prices down 0.9 per cent, after falling 0.5 per cent in July. It now has annual house price inflation at 3.9 per cent, from 6.6 per cent in July.

Martin Gahbauer, Nationwide’s Chief Economist, said: “Unless house prices bounce back strongly in September, the three month rate of change will turn negative next month. The annual rate of inflation – which compares the current average price with the price level twelve months ago – remained in positive territory at 3.9%. However, it is down quite sharply from rates of 6.6% in July and 8.7% in June.”

He also made some interesting comments on mortgages, saying: “Over the last two years, there have been significant changes to the characteristics of the mortgage stock, particularly with regard to the proportion of lending on fixed rate mortgages. Between the final quarter of 2008 and the first quarter of 2010, the proportion of mortgage balances on fixed rates fell from 48 per cent to 36 per cent, as fewer borrowers coming to the end of a fixed rate deal chose to remortgage onto a new fixed rate. This is primarily because of the availability of attractive standard variable rates.

“Borrowers on variable rates have experienced a very large cash flow benefit from the reduction in the Bank of England base rate in late 2008 and early 2009. The average rate paid on variable rate mortgage balances across the market was only 2.8 per cent in June, compared to 5.9 per cent in September 2008 and 5.3 per cent for fixed rate balances The additional cash flow from lower mortgage rates has been instrumental in keeping arrears and possessions relatively low during the recession, helping house prices to stage the rebound seen between early 2009 and the middle of 2010.

“However, while the increasing proportion of variable rate mortgage balances has allowed more borrowers to benefit from the low level of the Bank of England base rate, it also means that more households are exposed to potential future increases in interest rates. Should the proportion of variable rate mortgage balances remain high, the impact of base rate increases on monthly repayments, and therefore house prices, may be larger than in the past.”

Uncle Sam enjoys some relief.
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