The British economy, after contracting for six consecutive quarters on the back of the global recession that hit the economy last year, is now showing signs of recovery which provide evidence that the economy will mostly emerge from the downturn in the last quarter of the current year.
Interestingly, the housing market that suffered tremendously after the bubble burst has shown remarkable improvement as the economy began to recover from the worst recession since WWII. In November, U.K. house prices rose for a seventh month to 0.5% on the month and 2.7% on the year. Also, mortgage approvals climbed to 19-month high in October.
Today, Nationwide House Prices seasonally adjusted for December in the United Kingdom came in at 0.4%, lower than the previous 0.5%, yet higher than forecasts of 0.3%. On the year, the non-seasonally-adjusted reading jumped to 5.9%, above both preceding and expectations of 2.7% and 5.6% respectively.
Perhaps the main determinant of the recovery for the housing market is consumer spending and credit conditions. Household started to purchase houses again after confidence was restored on the vivid signs of recovery, especially in the third quarter when the economy eased the pace of contraction to 0.2% from 0.6% in the second quarter.
Although many households lost their income or part of it in the massive terminations wave that followed the start of the downfall, but unemployment slowed down in October to 7.9% from 7.8%, marking the slowest pace since 2008.
On the other hand, bank's credit conditions ameliorated thanks to the financial assistance by the BoE and bailouts by the government. Mervyn King and his economic team slashed the interest rate to 0.5% and introduced 200 billion pounds to purchase gilts.
However, some banks are still unable to meet the lending requirements set by the BoE. For instance, Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, the two bailed out banks by the government, are still below the lending rate set by the government.
The housing market may face difficulties in the new year as the government's budget deficit is swelling and the BoE may withdraw stimulus and hike interest rate, thereby discouraging mortgage lending. Some analysts are warning of drawback as housing prices are relying on temporary factors.
Kate Barker, Bank of England policy maker, mentioned in December that the lift up in U.K. house prices is unexpected and she anticipated the recovery may pause in 2010.
Today is the last day in 2009 that was a hectic year full of turbulences, but it seems from the data released from October to December that the fourth quarter may signal expansion.
With regard to growth outlook, the latest forecasts from the Confederation of British Industry refer that growth in 2010 will be 1.2% and 2.5% in 2011. Hence, recovery is expected to be sluggish and volatility is predicted since there might be a change in the monetary and fiscal measures.
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