Main U.K. Economic Releases for Week Commencing 31 March

Latest hard data and survey evidence indicate overall that the manufacturing sector is currently holding up surprisingly well, in the face of a worrying mix of softening domestic and foreign demand, tighter credit conditions, and elevated oil and commodity prices. A recent markedly softer pound is offering some relief to manufacturers, but it is unlikely to be able to offset these serious dampening factors over the coming months. Consequently, we forecast the manufacturing purchasing managers' index to have eased back to 51.0 in March after rallying to 51.3 in February, from a 29-month low of 50.7 in January. This is still modestly above the 50.0 level that indicates unchanged activity.

Meanwhile, the Bank of England will focus on the survey's output prices charged sub-index. This surged to a record high of 59.9 in February, as manufacturers looked to pass on sharply rising input costs. Indeed, the input prices sub-index jumped to a 39-month high of 72.2 in February. The Bank of England will be hoping that the prices charged index moved lower in March, thereby indicating that more difficult conditions are starting to dilute manufacturers' pricing power. This needs to increasingly happen for the Bank of England to enact significant further interest rate cuts over the coming months.

The dominant sector has lost significant momentum overall in recent months after extended buoyancy. Nevertheless, the business activity indexof the purchasing managers' service sector survey recovered to 54.0 in February, after sinking to a 55-month low of 51.9 in November from 56.7 in September and a peak of 60.6 in December 2006. We expect activity to have softened anew in March in the face of tightening credit conditions and elevated financial market volatility. Specifically, we forecast the business activity index to have fallen back to 53.3 in March.

While the Bank of England will pay significant attention to the activity and orders indices of the purchasing managers' survey, it will again be very interested in the prices indices. The prices charged index climbed to a record high of 56.8 in February, as service companies looked to take advantage of firmer demand to pass on their elevated input costs and support their margins. Furthermore, the input prices index also reached a record high of 65.6 in February, thereby maintaining pressure on service companies to lift their prices.  Unless the price indices start retreating appreciably soon, scope will be limited for the Bank of England to cut interest rates significantly.

Relatively muted service sector activity compared to the buoyant levels of recent years is also expected to be evident in the index of services (out Monday). This is expected to rise 0.5% in the three months to January compared to the three months to October.

Meanwhile, the construction purchasing managers index (out on Wednesday) is forecast to retreat to 51.5 in March. It fell to 52.4 in February (its lowest level since mid-2006) from 53.9 in January and a peak of 64.8 in August 2007. February's further slowdown in construction activity was primarily due to markedly weaker residential activity. Indeed, the house-building index indicated contracting activity for a third successive month in February, and at the fastest rate for nearly two years. This indicates that house builders are now very wary about the outlook for the housing market, as evidence consistently points to it slowing markedly in the face of increased affordability pressures and tighter lending practices. With the commercial property market in dire straits, the housing market cooling markedly, and weakened public finances limiting scope for infrastructure investment, there is a growing risk that the construction sector could be in for an extended hard time.

We expect Bank of England mortgage approvals and lending data (out Wednesday) to show that housing market activity continues to be dampened substantially by a combination of stretched affordability and tightening lending conditions.We anticipate that seasonally-adjusted Bank of England loan approvals for house purchases were limited to 72,000 in February. This would be down from 74,000 in January and would match December's lowest level since records began in 1999. It would also be down from 113,000 in mid-2007. We also expect the Bank of England to report that mortgage lending rose modestly to £7.7 billion in February from a 30-month low of £7.4 billion in January, primarily due to re-mortgaging activity as fixed deals taken out two years ago expire.

Muted housing demand, significantly tighter lending conditions and stretched affordability is expected to continue to feed through to dampen house prices over the coming months. We expect the Halifax to report during the week that house prices fell 0.5% month-on-month in March, following a 0.3% drop in February. Consequently, annual house price inflation is seen retreating to 2.2% in the three months to March, from 4.2% in the three months to February, and a peak of 11.4% in the three months to August 2007.

The Bank of England is also forecast to report on Wednesday that net consumer credit remained relatively muted at £0.9 billion in February. Going forward, consumer borrowing is likely to be hit by tightening lending standards, while consumers are likely to increasingly looking to rein in their borrowing. Rising debt levels, low household savings rates, lower equity prices, and higher mortgage rates for a number of people mean that there is an increasing need for many consumers to improve their finances. Furthermore, we suspect that mounting concerns over the economic outlook will cause consumers to look to save more. Consequently, an increasing propensity to save seems likely to significantly dampen consumer spending over the coming months.

Finally, we expect the Bank of England to report on Wednesday that housing equity withdrawal fell back to £9.8 billion in the fourth quarter of 2007, from £10.5 billion in the third quarter, and a peak of £13.4 billion in the fourth quarter of 2006. Higher mortgage rates, markedly tighter credit conditions, and softening house prices are expected to have reduced the attractiveness of, and scope for, housing equity withdrawal. Reduced housing equity withdrawal is likely to add to the increasing pressure on consumer spending. It should be noted that housing equity withdrawal is also used for other purposes, such as reducing debts, investing in other financial assets, and topping up pensions. For example, a significant proportion of housing equity withdrawal may be due to older people whose children have left home trading down and using the proceeds to supplement their pensions.

.By Howard Archer

31 March - Index of Services, January (3-Month/3-Month): 0.5%

1 April - Manufacturing Purchasing Managers Index, March: 51.0

2 April - Construction Purchasing Managers Index, March: 51.5

2 April - Bank of England Consumer Credit, February (GBP/Billion): +0.9

2 April - Bank of England Net Lending Secured on Dwellings, February (GBP/Billion): +7.7

2 April - Bank of EnglandNumber of Loan Approvals for House Purchase, February ('000s): 72

2 April - Bank of England Housing Equity Withdrawal (GBP/Billion): +9.8
3 April - Service Sector Purchasing Managers Index, March: 53.3

During week - HBOS Halifax House Prices, March (Month-on-Month): -0.5%