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Published: 20 August 2012 | Author: Caroline Purdey

  • The UK economy contracted for the third consecutive quarter in Q2 - a larger fall than expected. In light of this market commentators have revised down their forecasts for growth this year. 
  • The key housing market indicators appear to show a further softening in the market in the last month. However, we are still seeing distortions from one-off factors and we look forward to September when these should largely have worked their way through.


The UK economy was estimated to have contracted by 0.7% in the second quarter, the fact of a contraction – the third consecutive quarterly fall – was not a big shock. However the fall was larger than expected and something of a surprise to many.

But the implication of this figure for the longer term trend may not be as bad as this suggests. The one-off effect of the Diamond Jubilee is likely to have dampened growth – the Bank of England suggests by as much as 0.5% based on the experience from last year’s additional bank holiday. 

More positively, this month’s labour market figures showed a fall in unemployment, to 8% from 8.2% in the previous quarter. However, this has been partly attributed to an increase in part-time work – the number of people who are working part-time because they could not find a full time job was up by 16,000 to the largest total on record. 

Given the Q2 GDP figure it is no real surprise that commentators have revised down their forecasts for the UK economy this year. In a summary collated by HMT, on average economists are expecting a 0.2% fall in GDP this year, down from a small increase of 0.1% forecast a month ago. 

In the latest inflation report the Bank of England reported a weakening in its expectations for the UK economy compared to the outlook in May – both in the near term and throughout the projection period. 

Uncertainty and difficulty in the Eurozone continue to feature as a concern for the Bank and other commentators. At the end of July the yield on ten-year Spanish bonds reached 7.75%, and even shorter two-year bonds climbed above 7%. In his speech at the Global Investment Conference, Mario Draghi (the President of the European Central Bank) reassured that the ECB is “ready to do whatever is takes to preserve the euro” and that it thinks that the euro is “irreversible”. 

In addition the Bank also identifies fiscal consolidation, credit conditions and the slowing in the global economy as all contributing to the headwinds through which the UK economy is still navigating. 

The Bank’s near-term inflation expectations have lowered since the May report, and its view is now that inflation is more likely to be at or below the target rate for much of the forecast period. 

No policy changes were made in the latest meeting of the MPC. Having only recently announced a further round of quantitative easing and launched the new Funding for Lending Scheme (FLS) the Bank has already set in motion initiatives to counter the current weakness. 

Housing and mortgage markets

The housing and mortgage markets have been essentially flat for some time now, with different indicators displaying small upwards or downwards movements on a monthly basis. A review of a number of indicators does seem to suggest a softening in the market; however, we are still seeing distortions from one-off factors working their way through and we should not place too great a weight on these.

Both Halifax and Nationwide reported house price falls in July and RICS indicated that, with the exception of London, prices have been falling in all regions and it expects prices to fall further in coming months. 

New mortgage lending softened in June, according to the Bank of England gross lending totalled £11.7 billion in June, 6% lower than a year ago. When adjusted for seasonal affects gross lending totalled just under £11.0 billion – the weakest since December 2010.

Much of the weakness in June was the result of a dip in remortgage lending, while house purchase lending has remained relatively buoyant throughout Q2.

In total, 83,000 properties changed hands in June, an increase from May reflecting seasonal up-tick in the summer; when adjusted for seasonal factors, total transactions fell slightly. According to the surveyors, they saw a dip in July, but on balance their expectations remain positive for the coming months. 

Our recently published figures BTL lending continuing to increase and support total lending, this sector accounted for 11.4% of gross lending in Q2.  

Chart 1: BTL lending as a % of total gross lending

Source: CML research, Bank of England

Our forward estimate is for gross lending to total £12.7 billion in July (on an unadjusted basis), continuing the see-saw pattern seen throughout this year with an 8% increase from June.

Interpretation of recent trends continues to be challenged by one-off effects. We look forward to the September figures when the distorting effects of the Diamond Jubilee and the Olympics should largely have worked their way through.